Monetary authorities raised key borrowing costs for the third time this year by 25 basis points (bps) to five percent, citing volatile oil prices, the looming impact of El Niño, and potential wage hikes that could keep inflation elevated.

In its fourth policy meeting of the year on Thursday, Aug. 27, the policy-setting Monetary Board (MB) raised the benchmark rate from 4.75 percent previously, bringing the cumulative increase since April to 75 bps.

Similarly, the interest rates on the overnight deposit and lending facilities were adjusted to 4.5 percent and 5.5 percent, respectively. Before Thursday’s decision, these stood at 4.25 percent and 5.25 percent.

“Headline inflation has eased, although oil prices remain volatile,” the Bangko Sentral ng Pilipinas (BSP) said in a statement.

Inflation slowed to a three-month low of 6.2 percent in July from 6.4 percent in June and a more-than-three-year high of 7.2 percent in April. Core inflation, which strips out volatile food and energy items, also eased to 4.2 percent from 4.4 percent in June.

Besides oil costs, the BSP cited the “possible impact of severe El Niño conditions on agricultural prices posing further upside risks to inflation.”

“Potential wage adjustments also warrant close monitoring, including their implications for broader price setting and second-round effects,” the BSP further said.

The government’s plan to implement the historic ₱85-wage hike has been stalled due to court disputes.

Overall, the BSP said the “underlying price risks require preemptive monetary action.”

The BSP maintained that average headline inflation is expected to breach the four-percent target ceiling in 2026 and 2027 before easing back toward the three-percent target by 2028.

“The measured increases in the policy rate will continue to anchor inflation expectations and mitigate the risk of further second-round effects,” the BSP said.

The latest increase divided economists over whether the BSP has reached the end of its tightening cycle or will need another hike before the end of the year.

Capital Economics deputy chief emerging markets (EMs) economist Jason Tuvey expects the latest increase to mark the end of the BSP’s tightening cycle as policymakers increasingly turn their attention toward supporting the struggling economy.

The think tank expects the BSP to keep the benchmark rate at five percent for the remainder of 2026 before beginning to cut rates early next year.

However, Capital Economics said much will depend on developments in the Middle East, particularly disruptions to oil shipments through the Strait of Hormuz.

“If traffic through the Strait of Hormuz remains constrained and oil prices drift higher, BSP officials may be inclined to deliver further rate hikes in order to contain inflation and prop up the peso,” Capital Economics said.

The peso has come under renewed pressure, touching a fresh record low of nearly ₱62 against the US dollar last week.

Oxford Economics assistant economist Jun Hao Ng, meanwhile, expects the BSP to deliver one more 25-bp increase in October, which would bring the benchmark rate to 5.25 percent, before pausing to provide some support to economic growth.

For Oxford Economics, inflationary pressures remain significant despite the slowdown in July, with unexpectedly strong second-round effects posing a risk of extending the BSP’s hiking cycle.

The think tank expects inflation to accelerate again in August, largely due to higher domestic pump prices amid rising regional refined fuel prices.

Oxford Economics projects inflation to average 5.8 percent in 2026 and 3.9 percent in 2027, slightly more optimistic than the BSP’s outlook.

Bank of the Philippine Islands (BPI) lead economist Emilio Neri Jr. likewise said the latest increase was warranted given the inflation risks facing the economy.

“Five percent is not high at all. Too risky for the BSP not to hike. They might end up hiking much more in the future if they paused today,” Neri said.

Further raising key borrowing costs suggests that the BSP remains focused on stabilizing prices despite the economy’s sharp slowdown in the first half.

Gross domestic product (GDP) growth slumped to a post-pandemic low of 2.3 percent in the second quarter, weaker than the 2.8 percent expansion in the first quarter and 5.4 percent in the same period last year, bringing first-half growth to 2.6 percent.

Capital Economics said the economy is struggling with the impact of the energy shock on consumer spending as well as the effects of President Ferdinand R. Marcos Jr.’s anti-corruption campaign following last year’s multibillion-peso flood-control scandal.

While more timely indicators point to tentative signs of recovery, Capital Economics expects the rebound to be “slow and bumpy,” with the think tank’s GDP growth forecasts below consensus.

Oxford Economics similarly said weak second-quarter growth would likely make the BSP reluctant to deliver significantly larger rate increases despite persistent inflation risks.

The BSP, for its part, maintained that the country’s economic fundamentals remain intact despite the disappointing first-half performance.

“With the support of fiscal measures, growth is expected to strengthen in the second half of the year,” the BSP said.

Looking ahead, monetary authorities said they stand ready to take further action to ensure the normalization of consumer prices.