British banking giant HSBC expects the Bangko Sentral ng Pilipinas (BSP) to raise interest rates by another 75 basis points (bps) following its recent hikes as inflation is projected to significantly overshoot the target ceiling this year, while economic growth remains dampened.

“Higher oil prices and the uptick in rice prices have presented an inflation challenge for the Philippines and its central bank,” Desmond Kuang, Chief Investment Officer for Asia at HSBC Private Bank and Premier Wealth, said in a June 29 commentary.

Inflation cooled to 6.8 percent in May from a more-than-three-year high of 7.2 percent in April. Still, it exceeded the BSP’s target range.

“While the recent decline in oil prices is positive, we expect 6.2 percent inflation in 2026,” Kuang said. This projection, if realized, would breach the central bank's two-to-four percent target band for the year.

“Therefore, we expect the BSP to engage in modest tightening, hiking interest rates to 5.5 percent in 2026 before eventually reducing them to five percent by end-2027,” Kuang added.

As of June, key borrowing costs have been raised to 4.75 percent across two consecutive policy meetings. This continued policy tightening, required to curb surging prices, is expected to weigh on domestic economic growth, which has been slumping since late 2025.

According to the British lender’s Q2 2026 investment outlook, higher interest rates are likely to slow GDP growth to 3.4 percent in 2026. This falls slightly below the Marcos administration’s freshly lowered growth assumption of 3.5 to 4.5 percent, a revision prompted by the energy crisis stemming from the four-month-old US-Iran war.

On a positive note, despite the cooling domestic economy, the country’s financial landscape shows resilience compared to its neighbors.

“From a financial markets perspective, the Philippines has been more resilient than several Association of Southeast Asian Nations (ASEAN) peers,” Kuang noted, adding that this stability has been supported by the BSP’s hawkish stance.

“Recent rate hikes, as well as our expectation of future hikes, mean that interest rate differentials are likely to be supportive for the peso,” he said.

Kuang also highlighted that the recent inclusion of Philippine government peso bonds in JPMorgan Chase & Co.’s emerging-market index “should lead to foreign investor inflows,” providing a boon for the local currency.

These inflows, “combined with lower non-oil imports due to softer fiscal spending, lead us to expect the US dollar-peso pair to remain largely range-bound for the rest of 2026,” he noted.