Deutsche Bank AG expects the Bangko Sentral ng Pilipinas (BSP) to hold off on its next quarter-point interest rate increase until the first quarter of next year, as monetary authorities balance sticky inflation expectations against sputtering economic recovery.

The Frankfurt-based bank’s forecast follows signals from monetary authorities that they are hesitant to tighten policy further immediately, choosing instead to prioritize economic growth following a series of domestic and external headwinds.

On Aug. 27, the policy-setting Monetary Board (MB) decided to raise the benchmark borrowing rate by 25 basis points (bps) to five percent a move BSP Governor Eli M. Remolona Jr. described as a decision that “wasn’t so hard” even as all other options were considered.

According to the BSP, inflation could still flare up over coming periods given pressures expected from the looming El Niño and the potential implementation of a record-high ₱85 wage hike in Metro Manila. Such risks warranted “preemptive” policy action.

While a boon to price stability, further raising key borrowing costs could add stress to the country’s productivity. Domestic economic growth slumped to a post-pandemic low of 2.3 percent in the second quarter, bringing the first-half average to 2.6 percent.

Deutsche Bank believes further tightening remains on the table, citing the BSP’s elevated inflation assumptions for both 2026 and 2027.

However, the German lender expects the BSP to defer further tightening from October this year to February 2027: “We think the BSP would prefer to watch for potential changes in inflation expectations or second-round effects from earlier shocks before making its next move.”

Following its latest monetary policy meeting, the BSP now expects inflation to average 6.1 percent in 2026, down from its previous forecast of 6.4 percent. However, its inflation forecast for 2027 was raised to 5.4 percent from 4.5 percent.

Both updated assumptions remain well above the BSP’s two percent to four percent target range.

Headline inflation is expected to return near the three percent target by 2028. The revised outlook comes as inflation eased to 6.2 percent in July from 6.4 percent in June and a more-than-three-year high of 7.2 percent in April.

For August, Deutsche Bank believes inflation may have fallen further to 5.8 percent “on the back of favorable base effects in food prices.” If realized, August inflation would reach a four-month low.

Though forecasting higher figures than Deutsche Bank, Dutch financial giant ING and Singapore-based United Overseas Bank, Ltd. (UOB) also expect inflation to have softened to six percent on lower retail fuel prices.

“Core inflation pressures, though, should remain elevated, with food inflation continuing to pick up,” said Deepali Bhargava, ING regional head of research for Asia-Pacific.