Citing sustained price pressures, the Bangko Sentral ng Pilipinas (BSP) raised its key borrowing rate by 25 basis points to 4.75 percent from 4.5 percent, marking the monetary authority’s second consecutive benchmark hike.

This hawkish move signals that despite a slight dip in recent headline numbers, the battle against inflation is far from over.

“I won’t say the worst is over,” BSP Governor Eli M. Remolona Jr. told a press briefing on Thursday, June 18, referring to the persistent price pressures.

“Inflationary pressures remain strong,” the central bank added in an accompanying statement. The hike comes on the heels of a nearly four-month-long military rift between the United States (US) and Iran, which triggered spikes in global oil prices as the vital Strait of Hormuz remained blocked.

Headline inflation peaked at 7.2 percent in April before easing to 6.8 percent in May. Despite this cooling trend, elevated global oil costs continue to spill over into domestic consumer prices.

“Global oil and fertilizer prices remain elevated and continue to drive domestic fuel and food prices. Rising core inflation indicates broadening price pressures and second-round effects, including higher inflation expectations,” the BSP noted.

Core inflation—which strips out volatile items like food and energy—breached the central bank’s four percent target ceiling in May for the first time since December 2023.

“Today’s policy action will help keep inflation expectations anchored and mitigate the risk of second-round effects,” the BSP said, having previously warned that unanchored expectations could take root amid incessant oil shocks.

The central bank justified the additional rate hike on expectations that headline inflation will remain elevated, maintaining its forecast that average inflation will sit above the two-to-four percent target band through 2027. During the meeting, the BSP raised its inflation projections for 2026 and 2027 to 6.4 percent and 4.5 percent, respectively, up from its previous forecasts of 6.3 percent and 4.3 percent.

Against this backdrop, the BSP assured that it stands “prepared to take further monetary action as needed” to bring price growth back to target.

Remolona added that another quarter-point hike remains on the table under the central bank's current forward guidance. The Monetary Board's next policy meeting is scheduled for Aug. 27.

Asked whether the BSP prefers small increments or larger hikes, Remolona explained how different adjustment sizes address varying levels of uncertainty.

“Given the uncertainty—and depending on the type of uncertainty you face—you might want a bigger hike, because you want to prevent the unanchoring of inflation,” Remolona said.

He noted, however, that unanchored inflation expectations are not a major worry for the BSP right now, hence the preference for a series of measured hikes.

“If that’s not a big issue—and for now, it’s not a big issue—then you could go with what I call baby steps, so that if something unexpected happens, you can always adjust,” Remolona added.

Defending this agile posture, Remolona noted that the central bank can “always” hold an off-cycle meeting to deliver a complementary hike if shocks occur. He added that the BSP still has space for a larger 50-basis-point hike, especially if the magnitude of second-round effects demands a more aggressive response.

Meanwhile, the governor warned of market volatility tied to large policy shifts, explaining that the problem with such moves is that “it tends to disturb the markets if you reverse them,” making small steps a preferable approach.

“It’s better to do small moves in the same direction than a big move up and then a big move down. That’s more disruptive to markets,” Remolona said.

The central bank added that the latest tightening will “complement fiscal measures in supporting steady consumption and strengthening business sentiment.”

However, Remolona noted that a measured, less aggressive tightening pace is also intended to shield economic output.

“Growth has been disproportionately slow in the last few quarters. So we think that by not being too aggressive it may help the economy,” Remolona said. Domestic growth slowed to a five-year low of 2.8 percent in the first quarter, falling well short of the government's five percent minimum target.