BSP likely to sacrifice growth to tame inflation
Published May 25, 2026 12:00 am
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Updated May 23, 2026 02:48 pm
The inflation-targeting Bangko Sentral ng Pilipinas (BSP) is expected to continue raising interest rates to contain surging inflation despite the risk of slower economic growth.
In a May 22 report, Japanese financial giant MUFG Bank Ltd. said the Philippines is facing one of the most severe inflation shocks in Asia as elevated oil prices linked to Middle East tensions continue to feed into domestic prices.
“The inflation shock is most acute in the Philippines, where headline CPI [consumer price index] rose to 7.2 percent year-on-year in April even as first-quarter GDP [gross domestic product] growth slowed sharply to 2.8 percent year-on-year,” MUFG Global Markets Research noted.
“Despite the stagflationary backdrop, the BSP is likely to prioritize containing runaway inflation, implying further rate hikes even at the expense of near-term growth,” it added. Stagflation happens when inflation stays high even as economic growth slows and unemployment increases.
MUFG expects the BSP to hike rates by another 75 basis points (bps) before year-end, bringing the key policy rate to 5.25 percent from the current 4.5 percent.
The Japanese lender said that even under its base-case scenario of easing geopolitical tensions in the Middle East, it still expects “selective tightening” in the Philippines and India, while a more adverse scenario involving persistently elevated global oil prices would likely trigger broader policy tightening across Asia.
“The magnitude of tightening [would] likely [be] most pronounced in the Philippines and India,” MUFG said.
The BSP last month raised interest rates by 25 bps, ending its easing cycle as inflation accelerated beyond accelerated beyond the central bank’s two- to four-percent target band of year-on-year price increases deemed manageable and conducive to economic growth.
MUFG noted that headline inflation surged past the BSP’s projected range of 5.6 percent to 6.4 percent for April, prompting the central bank to signal readiness to take “all necessary monetary actions” to bring inflation back to target.
The lender also flagged growing pressure on the Philippine peso, which it said has weakened due to high energy prices, broad United States (US) dollar strength, and risk-off sentiment across Asian markets.
The peso plunged to a new historic low of ₱61.75 versus the greenback last week, “as markets digested high inflation and a hawkish BSP response,” MUFG said.
As of May 22, the peso depreciated by 6.5 percent against the US dollar since the Middle East conflict began in late February, making it the worst-performing Asian currency amid the war, MUFG data showed.
MUFG explained that the peso’s weakness reflected the Philippines’ vulnerability as a net energy importer, especially during periods of elevated oil prices and geopolitical uncertainty.
The Japanese lender had downgraded its 2026 Philippine GDP growth forecast to 3.5 percent, even slower than the post-pandemic-low expansion of 4.4 percent last year in the aftermath of the billion-peso flood-control infrastructure corruption scandal.
It forecasts inflation to average six percent this year, matching the full-year rate in 2023.
Meanwhile, Singapore-based DBS Bank Ltd. said the Philippines remains among the most vulnerable economies in Southeast Asia to the ongoing oil price shock due to relatively modest domestic subsidies and the faster pass-through of global fuel costs to consumers.
In a May 22 report, DBS Group Research senior economists Radhika Rao and Han Teng Chua said inflation outcomes across Association of Southeast Asian Nations (ASEAN) economies have been uneven despite the shared energy shock.
The Philippines posted the highest headline inflation in ASEAN-6 last month, hitting a more-than-three-year high compared with Vietnam’s 5.5 percent, Thailand’s 2.9 percent, Indonesia’s 2.4 percent, and Malaysia’s 1.9 percent.
DBS also warned that rising wholesale and producer price indices (PPIs) across the region indicate “pipeline pressures” that could eventually spill over into retail inflation as businesses pass on higher input costs to consumers.
“If geopolitical tensions persist, we view the Philippines, Thailand, and Vietnam to be most exposed to price pressures,” DBS said.
The Singaporean lender added that central banks would likely remain focused not only on inflation but also on exchange-rate and financial-market stability.
As such, “we expect further rate increases from Indonesia and the Philippines, with Vietnam next in line to raise rates,” DBS said.
Separately, Capital Economics chief emerging markets (EMs) economist William Jackson said some of the largest increases in inflation globally have come from Asian countries, like the Philippines, Pakistan, and Thailand.
“The conflict in the Middle East will lead to sharp falls in GDP in the Gulf economies and weigh on activity in energy importers, especially in Asia,” Capital Economics warned in a May 22 report.
Across EMs, “inflation has started to pick up and central banks have adopted a tightening bias,” such that “others are likely to follow Indonesia and the Philippines in hiking interest rates,” the think tank said.