Philippines surprises with jumbo interest-rate hike as inflation surges, peso slumps

The Bangko Sentral ng Pilipinas (BSP) surprised markets with a substantial interest-rate hike, signaling its determination to tackle resurgent inflation and support a weakening Philippine peso. The central bank increased the target reverse repurchase rate by 0.5 percentage points to 5.5%, a move that was anticipated by only one of 25 economists in a Bloomberg News survey.

The BSP emphasized that this decisive response would appropriately tighten monetary policy and anchor inflation expectations, preventing second-round effects.

The nation's benchmark stock index fell 0.7% after the decision, marking the end of a five-day winning streak. The Philippine peso continued its decline, hitting a historic low of 63 per US dollar for the first time in over a year. This weakened currency risks fanning inflation, as the country heavily relies on imports for fuel and food supplies.

The monetary authority has raised borrowing costs by a total of 125 basis points since the Iran war began in 2026, despite the Philippine economy growing at its slowest pace since the pandemic.

Inflation remains a significant challenge, with the BSP forecasting inflation to remain at 6.1% in 2026 and significantly rising to 6% in 2027. Governor Eli Remolona acknowledged the urgency to combat inflationary pressures, citing the impact of Middle East fighting on oil prices and transport costs. However, he expressed concerns about the peso's weakness and its impact on imported inflation, while stating that the BSP would not deplete its reserves to defend a specific currency level.

The governor also hinted at the possibility of improved domestic economic activity by the first quarter of 2027, supported by increased government spending. While further tightening is not out of the question for the BSP's December meeting, Pantheon Macroeconomics' Miguel Chanco noted that today's larger-than-expected adjustment could have been a front-loaded move.