The Bangko Sentral ng Pilipinas raised its policy rate by 25bp to 4.50% on April 23, in the process demonstrating the prioritisation of inflation risks after a sharp rise in price pressures throughout March, and despite a weakening growth backdrop, a note from Capital Economics reports. Further tightening appears unlikely, however, provided the war in the Middle East subsides in the near term.

The move divided expectations. Twelve of 26 analysts polled by LSEG had predicted an increase, while the remaining 14 foresaw no change on the horizon. The decision follows an unscheduled meeting in late March, at which Filipino policymakers opted to hold rates steady, an outcome that was seen as unusual for an off-cycle gathering. The subsequent rise in inflation though now appears to have shifted the central bank’s stance.

Much of the decision was likely based on headline inflation having accelerated to 4.1% y/y in March, breaching the official target range, and in large part driven by a surge in domestic fuel prices as a direct war of limited supply from the Middle East. Core inflation also edged higher, touching 3.2% y/y, and although global energy prices have eased in the past two weeks, and the Philippine peso has stabilised since the March meeting, policymakers now appear concerned about lagging behind the curve in addressing inflationary pressures. As such, the central bank characterised the latest increase as timely and pre-emptive, warning that inflation is likely to remain above target through the rest of 2026 and into 2027.

At the same time, the BSP struck a more cautious tone on the economic outlook by projecting continued weak growth throughout the remainder of 2026. As such, the balance of policy has shifted away from supporting activity.

GDP growth slowed to 3.0% y/y in the fourth quarter of last year, and the effects of the war, including higher inflation and government-imposed energy conservation measures, are seen as weighing on the recovery in the coming months.

Looking ahead, the BSP also acknowledged that the current inflation shock is largely supply-driven, thereby limiting the effectiveness of monetary policy. Its focus is therefore likely to centre on preventing second-round effects stemming from higher energy costs. Because of this, should the conflict ease and the current ceasefire last with the result that shipping through the Strait of Hormuz can return to normal, inflation concerns would be expected to recede. This would then permit policymakers to shift their attention back towards supporting growth and under such a scenario, additional rate increases would be unlikely.