The Bangko Sentral ng Pilipinas (BSP) raised its benchmark interest rate by 25 basis points (bps) to 4.5 percent on Thursday, April 23, a preemptive move intended to anchor inflation expectations as escalating Middle East tensions threaten to push domestic prices beyond the government’s target range.

In a statement, the central bank cited deteriorating global conditions—specifically higher oil and fertilizer costs—as the primary catalysts for the shift in its policy stance.

“The inflation outlook has deteriorated amid the ongoing conflict in the Middle East. Higher global oil and fertilizer prices have begun feeding through to domestic fuel and food prices,” the BSP said.

The BSP added that the rate increase aims to anchor inflation expectations and contain the buildup of second-round effects before price pressures broaden further.

The interest rates for the overnight deposit and lending facilities were also adjusted to four percent and five percent, respectively. This increase is intended to balance the need for price stability while still accommodating economic recovery over the medium term.

According to the BSP, consumer prices are now seen accelerating faster, with core inflation projected to continue rising.

“Inflation expectations have also risen further, heightening the risk of de-anchoring from the target due to more persistent inflationary pressures,” the BSP said.

Geopolitical tensions affecting global commodity prices have forced a shift in the policy stance. “We remain committed to ensuring price stability while supporting sustainable economic growth,” according to the BSP.

For one, average headline inflation is expected to breach the four-percent ceiling in both 2026 and 2027.

Risk now remains tilted to the upside, as rising inflation expectations heighten the danger of de-anchoring from the target.

“Inflation expectations remain manageable, but risks are tilted to the upside due to external uncertainties,” the BSP said.

Looking ahead, the BSP said it will continue to be guided by incoming data as it monitors whether further actions are necessary.

According to the BSP, it stands ready to take all required steps to ensure inflation returns to target. Future policy meetings will focus on the evolution of external risks and their impact on the domestic price stability mandate.

Reyes Tacandong & Co. senior adviser Jonathan Ravelas said the decision to increase key borrowing costs is a “right, calibrated, and preemptive move.”

“With oil and food prices feeding into core inflation and expectations starting to drift, acting early helps anchor credibility without choking growth. This is smart risk management—small, timely adjustments now to avoid much bigger and more painful hikes later,” Ravelas said.

For markets, Ravelas said the move strengthens the BSP’s commitment to managing inflation, lends support to the peso, and signals steady policy amid rising global uncertainties.

In a report, think tank Capital Economics said the BSP prioritized rising inflation risks following March’s spike in headline prices over concerns about weaker economic growth.

Capital Economics deputy chief emerging markets (EMs) economist Jason Tuvey noted that the move comes after an off-cycle meeting in late March, when policymakers unusually opted to keep rates unchanged, but the latest inflation print appears to have shifted their stance.

To recall, inflation accelerated to a 20-month high of 4.1 percent year-on-year in March, breaching the BSP’s target range as local fuel prices surged, while core inflation also edged up to 3.2 percent.

Although global oil prices have since eased and the peso has stabilized, the BSP said the hike was “timely and preemptive,” warning that inflation could remain above target through 2026 and 2027, Tuvey noted.

At the same time, Tuvey said policymakers acknowledged a weakening growth outlook, projecting continued subdued expansion in 2026 after gross domestic product (GDP) growth slowed to three percent in the fourth quarter of last year.

The BSP also noted that spillovers from the conflict, including higher energy costs and conservation measures, are weighing on recovery, with purchasing managers’ index (PMI) readings indicating further softness in March, Tuvey added.

While recognizing that the inflation shock is largely supply-driven and therefore less responsive to monetary policy, the central bank said it will focus on preventing second-round effects from higher energy prices, the think tank noted.

For Capital Economics, if geopolitical tensions ease and shipping routes normalize, inflation pressures could fade, potentially shifting policy attention back toward supporting growth, making further rate hikes unlikely under that scenario.

In a separate report, think tank Oxford Economics noted that the BSP became the first central bank in emerging Asia to tighten monetary policy as inflation concerns outweighed weakening growth prospects.

Oxford Economics assistant economist Jun Hao Ng pointed out that the move reverses the BSP’s easing cycle, which had seen a cumulative 225-bp cut since October 2023, and reflects growing worries about inflation spillovers and second-round effects.

Ng cited the BSP flagging core inflation continuing to rise, signaling broader underlying price pressures beyond food and energy. He added that the rate hike was intended to preemptively anchor inflation expectations and safeguard price stability following the BSP’s earlier unscheduled policy hold in March.

“We expect inflation to still edge higher in the coming months to average at 4.5 percent for 2026 as protests have emerged since the start of the [Middle East] conflict, criticizing the government for its lacking response,” Ng said.

“We are not expecting any further hikes for this year given that additional hikes may put a further drag on economic growth. Risks are tilted towards further hikes if inflation expectations show strong signs of de-anchoring,” according to Ng.