The Bangko Sentral ng Pilipinas (BSP) would likely continue hiking interest rates this year despite the lower-than-expected inflation rate in May, even as the pace of monetary policy tightening may be more gradual as economic growth remains subdued, according to Singapore-based United Overseas Bank Ltd. (UOB).

In a report last Friday, June 5, UOB senior economist Julia Goh and economist Loke Siew Ting said they expect the BSP to raise the policy rate by 25 basis points (bps) from the current 4.5 percent to 4.75 percent at the Monetary Board’s (MB) June 18 policy meeting, followed by another 25-bp increase in the third quarter.

The projected moves would bring the BSP’s target reverse repurchase (RRP) rate to five percent, after which the central bank is expected to hold rates steady, at least until early next year, in order to balance inflation control with economic expansion, UOB said.

Inflation slowed to 6.8 percent last month from April’s more-than-three-year high of 7.2 percent. UOB had forecast May inflation at a much higher 7.9 percent.

“Despite the moderation, headline inflation remains well above the BSP’s four-percent ceiling, while core inflation rose to a 29-month high of 4.1 percent year-on-year in May, signaling persistent underlying pressures and emerging second-round effects that warrant further tightening,” UOB said.

The Singaporean bank attributed the lower-than-anticipated latest inflation print mainly to softer food, fuel, and electricity prices, coupled with improved market sentiment and a modest retreat in global energy prices amid ongoing ceasefire discussions between Iran and the United States (US).

Despite easing inflation, UOB said underlying price pressures continued to build. It cited that core inflation, which excludes volatile food and energy items, accelerated for a fifth straight month and breached the upper end of the BSP’s two- to four-percent target band for the first time since December 2023.

UOB said risks to the inflation outlook remain tilted to the upside as geopolitical tensions in the Middle East continue to push oil prices higher. Additional threats include the sustained depreciation of the Philippine peso as well as the possibility of El Niño conditions intensifying in the coming months, it added.

The Singapore lender noted that a prolonged dry spell due to El Niño has an 80-percent chance of developing between June and August, which could affect farm output and place renewed pressure on food prices.

As such, UOB retained its full-year 2026 inflation forecast at 7.5 percent, way above the BSP’s latest estimate of 6.3 percent. If achieved, UOB’s inflation projection for this year would be the highest since the 8.2 percent recorded at the height of the global financial crisis (GFC) in 2008.

While monetary policy is expected to remain the primary tool for containing inflation, UOB said targeted government measures to stabilize food prices would also play an important supporting role in bringing inflation back toward the BSP’s target range.