Bangko Sentral ng Pilipinas (BSP) raised the target reverse repo rate by 25bp to 4.50%, its first increase since September 2023. A Bloomberg poll showed market expectations were split 50-50 on a rise.
The move aimed to anchor inflation expectations and limit second-round inflation effects. BSP previously tightened in 2018 and 2022 when headline CPI moved above its 2-4% target band.
New Hiking Cycle Begins
Headline CPI rose to 4.1% year on year in March 2026. BSP Governor Remolona said a 50bp increase was also discussed and described the change as the start of a new hiking cycle.
BSP said the current stance should still support recovery over the medium term. It lowered its full-year growth forecast to 4.3% from 4.6%, below the government’s 5-6% target range.
BSP pointed to downside risks from Middle East conflict-related supply chain disruption, slower public spending disbursements, and weaker sentiment linked to graft allegations. It said fiscal policy can support growth.
BSP expects broader price pressure through transport costs and fertiliser prices, with spillovers into core CPI categories. It is monitoring inflation expectations to prevent wage-setting from reinforcing supply-driven inflation.
Implications For Rates And FX
The peso has underperformed regional peers since the Iran war, with the Philippines exposed to Middle East energy prices.
The central bank has signaled that this is the beginning of a new rate hike cycle, with the governor even noting a 50 basis point hike was on the table. This strong forward guidance suggests we should position for higher short-term interest rates in the coming months. We believe paying fixed on 1-year Philippine Peso interest rate swaps is a clear way to express this view.
We’ve seen this playbook before from the central bank, particularly during the aggressive hiking cycle in 2022 when inflation last broke above the target range. Back then, inflation continued to climb for several months, peaking well above 8%, forcing the BSP to hike rates repeatedly. With March 2026 inflation already at 4.1%, this cycle could have a long way to run if price pressures keep building.
Normally, rate hikes would strengthen a currency, but we are not seeing that with the Peso. The currency’s weakness is being driven by external factors, especially the country’s high dependence on energy imports. With Brent crude oil now hovering around $110 a barrel due to the ongoing conflict in the Middle East, the import bill is swelling and weighing heavily on the currency.
Therefore, the path of least resistance for the Peso is likely weaker, despite the central bank’s actions. We should consider buying US Dollar call options against the Peso, targeting a move back towards the historical highs of 59.00 seen in late 2022. The government’s own lowered growth forecast of 4.3% and concerns over fiscal policy will only add to this negative sentiment.
