Central Bank maintains policy rate in March

Rate remains at over three-year low: At an unscheduled meeting on 26 March, the Bangko Sentral Pilipinas (BSP) decided to maintain the policy rate at 4.25% after reducing it in February. The meeting was held to assess the impact of the Iran war on inflation and GDP growth and to reassure market participants that the Bank remains vigilant of the situation. The policy rate remains at its lowest level since August 2022.

BSP trapped between high inflation and low GDP growth: The Bank did not cut rates, as it projects inflation to breach the 4.0% target ceiling this year. Still, it did not opt for a hike, as price pressures are forecast to return to the tolerance range in 2027. Additionally, the BSP noted that current price shocks are largely supply-driven and that raising the policy rate could hinder economic recovery amid expected weak GDP growth this year.

Bank turns hawkish: In its forward guidance, the BSP said that “mounting risks to inflation will require sustained vigilance,” and policy moves will focus on ameliorating the impact of potential second-round effects to maintain price stability. Compared to last month, when a majority of panelists expected rate cuts by December, most of them now expect the BSP to either stand pat or hike rates from their current level by the end of the year, with a growing number of analysts now seeing average inflation sharply above target in 2026. The evolution of oil prices and the effectiveness of government measures to dampen inflation remain key factors to watch. The BSP is scheduled to reconvene on 23 April.

Panelist insight: ING’s Deepali Bhargava commented: “The collapse in government spending has fed through to weaker investment and consumption, creating a materially softer growth backdrop and heightening downside risks. Real policy rates were already elevated before the oil price shock, meaning an additional hike would further constrain investment. Given this weaker growth setting, and assuming the current conflict eases soon, our base case is that the BSP remains on hold in April. That said, if oil prices stay above $100/bbl in our longer-war scenario, and with limited signs of de-escalation in the ongoing conflict, the BSP may be compelled to consider raising rates as soon as April.” EIU analysts were more dovish: “We expect inflation to return to target after a breach in the second quarter and to average 3.2% over the year as a whole. We expect the BSP to resume rate cuts towards the end of 2026, to provide support to a subdued economy. […] However, if global energy prices were to remain higher for longer, the outlook for monetary policy would shift. In this scenario, which has a 25% probability, rate increases would probably be on the table, with the central bank facing the tough decision to raise interest rates despite a growth shock, in order to maintain policy credibility, anchor inflation expectations and support the currency.”

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