BSP. Monetary Board delivers a surprise 50-bp hike to fight broadening inflation

Highlights

• A 50-bp hike on October 22 lifted the Target RRP to 5.5%, a move only 2 of 22 respondents in a BusinessWorld poll expected.
• Headline inflation hit 7.2% in September, the seventh straight month above the BSP's 3% target.

The Setup

The Monetary Board's 50-bp increase was its first of that size since February 2023 and its fourth consecutive tightening, bringing cumulative hikes to 125 bps since April. The policy rate is now the highest in nearly two years, since the 5.75% in February 2025, and matches the level set in April 2025, while overnight deposit and lending rates rose to 5% and 6%. Core inflation, which strips out food and fuel, accelerated to 4.7%, a nearly three-year high. The PSEi fell 0.72% to 5,779.73 after the decision, snapping a five-day rally.

Source: BSP press release

Our Read

The BSP moved big because its own outlook worsened. It raised its 2027 inflation forecast to 6% from 5.4% while keeping this year's at 6.1%, and Remolona said "the forecasts were worse than we thought." Deputy Governor Zeno Abenoja added that core inflation may keep rising over the next few months and perhaps into early 2027, so the BSP sees price pressure broadening, not fading.

The peso adds a second channel: the BSP reference rate weakened to 63.419 per dollar on October 23 from 62.698 a month earlier, and Remolona flagged depreciation as potentially inflationary, though he said the BSP does not tighten to support the peso.

What We're Watching

• The Monetary Board's final meeting of the year on December 17.
• El Niño, which PAGASA expects to peak before year-end and last into the first quarter of next year.