Pantheon says BSP tightening cycle likely over as inflation to further ease

UNITED KINGDOM-BASED think tank Pantheon Macroeconomics sees the Bangko Sentral ng Pilipinas (BSP) holding off on any further monetary policy tightening as it expects inflation to undershoot the central bank’s revised forecasts.

Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said the BSP’s latest inflation outlook seems “overly pessimistic.”

Following its August policy review, the central bank revised its full-year inflation estimates to 6.1% from 6.4% for 2026, 5.4% from 4.5% for 2027, and 3.3% from 3.1% for 2028.

“These all seem overly pessimistic to us, particularly next year’s projection, which undoubtedly will be dragged down massively by base effects,” Mr. Chanco and Ms. Gupta said in a note on Tuesday.

They noted that inflation will likely ease for a fourth straight month in August, with their forecast matching market consensus at 6%.

“Inflation likely cooled further in August, to 6% from 6.2% in July, albeit thanks mainly to favorable food base effects,” Mr. Chanco and Ms. Gupta said.

“A slight re-acceleration in the transport lift, by 0.1 ppt (percentage point), should prevent a more noticeable headline drop,” they added.

A BusinessWorld poll of 20 analysts conducted last week yielded a median estimate of 6% for the August headline print, easing from 6.2% in July but accelerating from 1.5% a year ago.

If realized, inflation would hit its slowest pace in four months or since the 4.1% in March.

However, it also means that inflation would breach the central bank’s 3% target for six months in a row, bringing the eight-month average clip to 5.1%.

The Philippine Statistics Authority is scheduled to release the August inflation report on Friday (Sept. 4).

Meanwhile, Mr. Chanco projects core inflation, which excludes volatile food and oil prices, to slow to 4.1% from 4.2% in July.

“That being said, core inflation should continue to ebb, slipping to 4.1% from 4.2%, providing additional comfort to policymakers, especially the BSP,” he said in an e-mail.

Last month, the Monetary Board delivered its third consecutive 25-basis-point (bp) hike, bringing the benchmark interest rate to an over one-year high of 5%.

It has so far raised rates by a total of 75 bps since it began its tightening cycle in April.

According to Mr. Chanco and Ms. Gupta, the BSP’s August hike likely marked the end of its tightening cycle as they expect inflation to settle at 5% in the fourth quarter before cooling further to 3.4% in the first quarter of 2027.

“Only 20% of surveyed forecasters, including us, incorrectly expected the Bank to hit the pause button, though we believe that the August hike will be its last,” they said.

As of August, Pantheon Macroeconomics’ 2026 inflation estimate stands at 5.3%.

On the other hand, Singapore-based Oversea-Chinese Banking Corp. (OCBC) still expects the BSP to extend its tightening cycle up to a fifth consecutive hike this year to ensure inflation risks are contained.

“Looking ahead, although the Governor noted that the hike was preemptive and aimed at mitigating the price pressures from the severe El Niño phenomenon and minimum wage increases, he did not close the door on further rate hikes,” OCBC said in a separate report dated Aug. 31.

“We expect BSP to remain focused on keeping price pressures contained,” it added.

OCBC’s baseline policy call prices in an additional 50 bps worth of hikes, through two consecutive quarter-point increases, to bring the key policy rate to 5.5% by yearend.

BSP Governor Eli M. Remolona, Jr. has said he hopes they won’t have to tighten further but left the door open for additional hikes as needed to bring inflation closer to their target.

OCBC also acknowledged that its growth outlook for the Philippines is “less optimistic” than the central bank.

OCBC sees the country’s gross domestic product growing by a new post-pandemic low of 3.2% this year, slower than last year’s 4.4%.

Mr. Remolona has said growth will start picking up in the fourth quarter before reaching full recovery next year, noting that the country’s medium-term economic fundamentals remain intact.

Meanwhile, GlobalSource Partners Country Analyst Diwa C. Guinigundo noted that while the BSP made the right call to hike for a third straight time, it must ensure a clearer forward guidance ahead of its next meeting.

“The issue is not simply whether the BSP should raise, hold or eventually cut its policy rate,” he said in an Aug. 31 commentary. “The more fundamental question is whether monetary policy is sufficiently restrictive in real terms to bring inflation back to target and keep expectations firmly anchored.”

Mr. Guinigundo, a former BSP deputy governor, said the central bank must not be complacent on the back of its elevated inflation outlook and the peso’s continued depreciation. 

This means reaffirming its commitment to its price stability mandate in a policy environment challenged by the trade-off between containing inflationary pressures or supporting tepid growth, he added.

“If inflation remains elevated and the real policy rate remains negative, simply holding the nominal rate unchanged could be interpreted by markets as a further easing of the real monetary stance. That would be the wrong signal,” Mr. Guinigundo said.

“The BSP should resist the temptation to declare the tightening cycle effectively finished simply because growth is weak. This is not an argument for indiscriminate tightening or for ignoring growth. It is an argument for recognizing the hierarchy of responsibilities,” he added.

The Monetary Board will have its last two rate-setting meetings this year on Oct. 22 and Dec. 17. — Katherine K. Chan