Another rate hike? The case for 50 basis points
The Philippine economy faces a difficult policy dilemma as inflationary pressures intensify even as economic activity remains weak. Headline inflation has accelerated, while core inflation has risen from 2.4% in the first nine months of 2025 to 3.8% in the same period of 2026, suggesting that price pressures may be becoming more broad-based. With the BSP’s inflation projections for 2026 and 2027 remaining above target, the risk is that elevated inflation could become more persistent, erode household purchasing power, and weaken confidence. Yet a sustained negative output gap indicates that economic activity remains below potential, complicating the calibration of monetary policy.
Against this backdrop, a 50-basis-point increase in the BSP policy rate merits serious consideration to help anchor inflation expectations and contain the risk of further price increases, while recognizing the limits of monetary policy in addressing supply-side pressures. Delaying an appropriate response could allow inflation to persist, eventually producing possible demand destruction as households cut consumption because their real incomes can no longer keep pace with prices. Conversely, excessive tightening could further restrain investment, consumption, and growth. The challenge is therefore to strike a careful balance: act decisively enough to preserve price stability without unnecessarily deepening the slowdown, while complementing monetary policy with credible fiscal action and targeted measures to address food supply, energy costs, and other structural sources of inflation.
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