An off-cycle policy meeting by the Bangko Sentral ng Pilipinas (BSP) could signal to investors that the central bank is falling behind the inflation curve, potentially triggering further market volatility, according to a former senior policymaker.

Diwa Guinigundo, a former BSP deputy governor who now serves as the Philippines country analyst for GlobalSource Partners, questioned whether the surge in April inflation to a three-year high would justify an emergency interest rate hike.

The central bank's key policy rate currently stands at 4.5 percent. An unscheduled gathering of the policy-making Monetary Board could inadvertently fuel investor anxiety, Guinigundo believes.

“An off-cycle meeting of the Monetary Board (MB) actually triggers more market jitters and gives the impression that BSP is behind the curve, and it’s trying to catch up,” Guinigundo told Manila Bulletin on Tuesday, May 5.

“What is also necessary is for the BSP to clarify and stress that while the price pressures do originate from the supply side, if monetary policy does not act, second round effects may be triggered sooner than later, inflation expectations may even be significantly de-anchored. Then, inflation may be entrenched even more deeply,” he added.

The warning comes as banks and regional lenders rapidly escalate their hawkish forecasts for the Philippines.

American banking giant Citi’s analysis of April figures reveals a situation far more volatile than it initially anticipated, noting that the inflation in the second month after the energy shock exceeded its 6.3 percent forecast and the upper range of the BSP's projection of 6.4 percent.

Citi noted that the “sharper diesel price increase so far versus during the 2022 energy shock likely quickened the second round effects on food, via logistics costs.”

Citi has shifted its baseline to expect exactly the type of maneuver Guinigundo cautioned against.

“We now expect an off-cycle meeting in May, where the BSP hikes 25 basis points (bps), followed by further 25 bps hikes in June and August,” said Citi. This would settle at a final rate of 5.25 percent by the end of the year.

Oversea-Chinese Banking Corp. (OCBC) Group Research is similarly sounding the alarm, pointing to a prolonged period of instability that extends well into the next year.

According to the Singaporean lender, “these dynamics significantly heighten inflationary risks and imply a sustained breach” of the BSP’s tolerance band.

It forecasts headline inflation to average 5.8 percent in 2026 and 4.5 percent in 2027, a sharp upward tweak reflecting “more pronounced and persistent pass-through from higher energy and logistics costs.”

While OCBC’s baseline for rate hikes is slightly more conservative than Citi’s, they still anticipate an aggressive policy tightening. It has pencilled in two quarter-point rate hikes to five percent by year-end.

Both lenders point to the Philippines’ vulnerability to global geopolitical shocks. OCBC stressed that the ongoing Middle East conflict bares the domestic economy’s exposure to global energy disruptions, particularly given its extreme reliance on imported oil.

Exacerbating this are currency pressures, with Citi noting that the peso has further declined since the eruption of the war. Such a development could force the BSP to price in a stronger foreign exchange (forex) transmission in its coming meetings.

Sharp rate increases have typically been the go-to response when inflation reaches six to seven percent, but Citi expects the BSP to stick with a gradual approach.

Citi noted that the economy is entering this inflation shock with weaker economic growth compared to past tightening cycles, suggesting that a lower terminal real policy rate may be more appropriate to prevent stifling the economy.