More BSP rate hikes likely on sticky core inflation

By Katherine K. Chan, Reporter

HEADLINE INFLATION may have peaked but core inflation still shows signs of persistent underlying pressures, which could keep the Bangko Sentral ng Pilipinas (BSP) on its tightening path, analysts said.

This as the softer core print in July was likely temporary given other energy-sensitive commodities continued to rise, according to Nomura Global Markets Research Chief ASEAN Economist Euben Paracuelles and Economist Nabila Amani.

“The decline was not broad-based, as it was mainly due to lower education fees, led by a drop in fees at the primary and secondary education levels, which are likely one-off, in our view,” they said in a report on Wednesday.

“Other items sensitive to high energy costs are, by contrast, still adjusting higher, in line with our view, including food services, recreation activity and accommodation,” they added.

Headline inflation cooled for a third straight month at 6.2% in July from 6.4% in the previous month, the Philippine Statistics Authority reported on Wednesday.

However, core inflation, which excludes volatile food and energy prices, slowed to 4.2% in July from 4.4% in June, but accelerated from 2.3% a year ago.

The core print captures second-order effects or when initial price shocks prompt businesses to pass on the burden of higher costs to consumers by raising the prices of commodities and services, such as utilities and transport.

This allows economic managers to determine whether prevailing consumer price movements reflect short-lived disruptions or a long-term trend.

“In terms of trajectory, we continue to believe headline inflation has already peaked, underpinned in part by our crude oil price assumption, but core inflation has not, as we see pass-through effects from energy prices continuing,” Mr. Paracuelles and Ms. Amani said.

Their projection comes with the assumption that the cost of global crude oil will fall to $72.4 a barrel in the second half of the year from $85.4 a barrel in June.

Nomura also kept its forecast that headline inflation will average 5.1% this year, with core inflation at 3.9%.

For Maybank Investment Bank Chief Economist Suhaimi Illias and Economist Azril Rosli, however, the sticky core inflation and fresh risks could drive inflation to 5.3% this year and 4.9% next year. These are higher than their previous forecasts of 4.7% and 4.5%, respectively.

“Looking ahead, we expect headline inflation to moderate gradually in the second half of 2026, supported by easing global oil prices, improved food supply conditions and government measures to stabilize essential commodity prices,” they said in a separate report dated Aug. 5.

“Nevertheless, sticky core inflation, higher labor costs, the proposed income tax revision and lingering geopolitical uncertainties are likely to keep price pressures elevated.”

As of July, headline inflation stood at 5%, still below the central bank’s 6.4% estimate for the year, while core inflation averaged 3.6%.

“Philippines’ inflation remains the highest in the region, with July’s print of 6.2% yoy (year on year) still breaching the central bank’s target, despite easing from its recent peak,” DBS Group Research said in a separate note on Thursday.

According to the Singaporean bank, the latest reading and BSP’s hawkish stance have raised the odds of a third straight rate hike to manage inflationary expectations.

“The latest CPI inflation reading is unlikely to change that stance from BSP, in our view, but justifies its preference for a measured approach to its hiking cycle,” Mr. Paracuelles and Ms. Amani also said.

The Nomura economists are anticipating two more rounds of measured tightening by the BSP, with one 25-basis-point (bp) hike each at its August and October meetings.

“We reiterate our forecast for BSP to hike by another 50 bps this year, delivered in 25-bp clips over each of the next two meetings (August and October),” they said.

“We believe BSP remains concerned about rising core inflation and is highly vigilant of upside risks overall, likely due a combination of still-high uncertainty in crude oil prices, some impact from higher-than-expected wage hikes and prospects of a strong El Niño,” they added.

The case for further rate increases also remains strong amid lingering price pressures and emerging inflation risks from multiple fronts, according to Mr. Illias and Mr. Rosli.

They now expect the BSP to deliver two more 25-bp increases, larger than its earlier call of a final 25-bp hike this month.

“We expect the BSP to raise the policy rate to 5.25% by end-2026 (previously: 5%), while maintaining a restrictive policy stance to anchor inflation expectations and contain second-round effects,” Mr. Illias and Mr. Rosli said.

Since it began tightening in April, the Monetary Board has delivered a cumulative 50 bps in hikes to bring the key policy rate to a near one-year high of 4.75%.

In its statement following the July inflation report, the central bank reaffirmed that it remains open to taking monetary policy action to ensure inflation will return near its 3% target.

BSP Governor Eli M. Remolona, Jr. has also left the door open to further tightening, with a “small chance” of a 50-bp increase at their meeting later this month.

The Monetary Board will hold its fourth policy review this year on Aug. 27, with its two remaining meetings scheduled on Oct. 22 and Dec. 17.