At A Glance
- Foreign and local banks have priced in key borrowing costs to settle at a minimum of five percent by the end of 2026 as the stagflationary pressure in the second quarter, and the looming end of the Middle East war limit how far monetary authorities could raise borrowing costs.
The Bangko Sentral ng Pilipinas (BSP) is facing a delicate balancing act as foreign and local lenders price in a minimum five percent benchmark interest rate by the end of 2026.
Economists said that mounting stagflationary pressures and the potential de-escalation of geopolitical conflicts in the Middle East will likely limit how aggressively monetary authorities can tighten policy.
Union Bank of the Philippines has penciled in at least two 25-basis-point increases by the end of this year, lifting the key rate to five percent from the current 4.5 percent.
Ruben Carlo O. Asuncion, chief economist at UnionBank, wrote in a commentary published Friday, May 29, that while his base-case scenario sees the policy rate peaking as high as 5.5 percent, the central bank may utilize off-cycle moves in the second half of 2026 to manage shifting economic conditions.
Similarly, Singapore-based United Overseas Bank expects the Philippine central bank to deliver two quarter-point hikes, distributed between its upcoming June policy meeting and the third quarter.
UOB Economist Lee Sue Ann noted that these measured adjustments are designed to anchor domestic inflation expectations while remaining supportive of medium-term economic growth.
The adjustments come as the BSP aggressively raised its consumer price forecasts due to the domestic impact of global supply disruptions. The central bank boosted its 2026 inflation forecast to 6.5 percent from 5.1 percent, and its 2027 projection to 4.3 percent from 3.8 percent.
Both figures sit comfortably above the government’s official target band of two percent to four percent, signaling prolonged price pressures for the domestic economy.
Monetary policymakers are operating under intense scrutiny after the cpuntrys’ gross domestic product (GDP) expansion slowed to 2.8 percent in the first quarter, its weakest performance in five years.
Coupled with a three-year high inflation rate of 7.2 percent in April, the macroeconomic data has triggered widespread market concern that the country is entering a period of stagflation, threatening a reversion to its historical moniker as the “sick man of Asia.”
While raising interest rates typically cools demand-driven inflation, it risks further stifling an already fragile economic recovery.
Asuncion indicated that the BSP is unlikely to chase peak inflation amid subdued domestic demand environment, reducing the scope for what he termed “monetary overkill.”
The central bank is expected to weigh the anemic GDP growth alongside the delayed pass-through of global commodity shocks.
Asuncion cited a confluence of factors restraining an aggressive domestic tightening cycle. Beyond the steep growth slowdown observed in late 2025 and early 2026, which occurred ahead of the full impact of March oil shocks, looming stagflation risks in the second quarter are tempering hawkish sentiment. Furthermore, a growing likelihood of a diplomatic agreement between the United States and Iran to end their conflict and reopen the Strait of Hormuz could alleviate global energy pressures, giving Philippine rate-setters more breathing room.