Another interest rate hike looms

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to raise its benchmark interest rate to 5.25 percent by year-end as elevated oil prices and peso weakness complicate the inflation outlook, according to Union Bank of the Philippines and ANZ Research.

Their separate reports point to another 25-basis-point increase from the current five percent policy rate, which influences borrowing costs for households and businesses.

However, the two banks differ on how soon borrowing costs could decline.

UnionBank chief economist Ruben Carlo Asuncion sees an increase in October potentially paving the way for a year-end pause, while ANZ projects a 5.25-percent rate by December.

Asuncion said an October increase would bring cumulative tightening in the BSP’s current cycle to 100 basis points as policymakers seek to contain inflation risks from oil prices above $100 per barrel and a peso approaching 63 against the dollar.

“Such an outcome could strengthen the case for a pause in the hiking cycle by year-end,” the UnionBank report said.

A weaker peso makes imported fuel and other goods more expensive in local currency, potentially raising transport and production costs that businesses could pass on to consumers.

ANZ head of Asia research Khoon Goh identified the Philippines as among the economies more exposed to high oil prices and rising interest rates in the United States, despite broader resilience across Asian financial markets.

Much of the region has benefited from an artificial intelligence (AI) investment boom that has lifted demand for semiconductors, servers and equipment used in data centers.

Stronger exports have helped several economies build current account surpluses, providing a cushion against more expensive oil and higher global borrowing costs.

Goh identified India, Indonesia and the Philippines as exceptions to the region’s stronger position because they run current account deficits and are not major beneficiaries of the AI boom.

“The currencies of these three economies are also the worst-performing ones year to date, as high oil prices raised the import bill while higher US interest rates made it more challenging to attract portfolio inflows to fund external deficits,” he said.

ANZ forecasts the peso at 63 against the dollar by end-2026 before recovering to 61.50 by end-2027. UnionBank projects year-end levels of 62.30 and 61.52, respectively.

The two also expect slower Philippine economic growth this year, although their estimates differ. UnionBank forecasts gross domestic product, the value of goods and services produced in the country, to expand by 2.8 percent in 2026, while ANZ projects a 3.5-percent growth.

For 2027, UnionBank sees growth recovering to 3.8 percent while ANZ expects five percent.

UnionBank forecasts inflation to average 5.3 percent this year and 4.3 percent next year, compared to ANZ’s estimates of 6.2 percent and 5.2 percent, respectively.

Despite the pressures, Asuncion cited buffers including a well-capitalized banking system, international reserves covering more than six months of imports, and steady receipts from overseas Filipino workers and business process outsourcing services.

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