BSP extends tightening cycle with third straight interest rate hike

Insider Spotlight

• The BSP raised its benchmark reverse repurchase rate by 25 basis points to 5.0 percent, marking its third straight quarter percent rate increase this year
• The move extends the central bank's tightening cycle after officials had repeatedly signaled in 2025 that 2026 would likely bring rate cuts before geopolitical shocks upended the inflation outlook
• Policymakers warned that oil price volatility, El Niño risks and possible wage adjustments continue to threaten inflation despite easing headline price growth
  
  
  
  

The Bangko Sentral ng Pilipinas raised its benchmark interest rate by 25 basis points on Thursday, delivering its third consecutive quarter percent rate hike this year as policymakers sought to contain persistent inflation risks after a series of shocks derailed expectations that 2026 would instead usher in monetary easing.

In a statement on Aug. 27, 2026, the central bank said its Monetary Board increased the target reverse repurchase rate to 5.0 percent from 4.75 percent. The overnight deposit and lending facility rates were likewise adjusted to 4.5 percent and 5.5 percent, respectively.

The big picture

The latest increase extends the BSP's unexpected tightening cycle after officials spent much of last year projecting that 2026 would be a year of policy rate cuts. However, renewed inflation pressures, including higher global oil prices following the Iran conflict, forced the central bank to reverse course.

Headline inflation has eased in recent months, but the BSP said risks remain tilted to the upside.

Why it matters

The central bank cited volatile oil prices, the possible impact of severe El Niño conditions on agricultural prices and potential wage adjustments as key threats that could fuel broader price pressures and trigger second-round inflation effects.

"These underlying price risks require preemptive monetary action," the BSP said.

Despite Thursday's increase, the central bank said the average headline inflation is still projected to breach the upper end of its 2.0 percent to 4.0 percent target range in 2026 and 2027. Core inflation estimates likewise point to broadening price pressures, although headline inflation is expected to ease toward the 3.0 percent target by 2028.

Looking ahead

The BSP said the measured increases in policy rates are intended to anchor inflation expectations while limiting the risk of further second-round effects.

The central bank acknowledged that economic growth slowed during the first half of 2026 but maintained that medium-term growth fundamentals remain intact. Supported by fiscal measures, economic activity is expected to strengthen in the second half of the year.

Looking ahead, the Monetary Board said it stands ready to take further monetary policy action as needed to ensure inflation returns to its 3.0 percent target, consistent with its price stability mandate. —Daxim L. Lucas | Ed: Corrie S. Narisma