It was observed that underlying price pressures are still building, keeping the Bangko Sentral ng Pilipinas under pressure to tighten policy further as the agency attempts to cope up with rising core inflation.
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Economists from Nomura Global Markets Research, Deutsche Bank Research and HSBC said that the softer-than-expected May inflation print does not remove the need for more rate hikes. Unless the agency implements aggressive measures, the situation could result to further economic instability, especially if core inflation continues to breach the target of two to four percent for the first time since December 2023.
Headline inflation slowed to 6.8 percent in May from 7.2 percent in April. This falls below market expectations and the forecast range of the central bank of 7.1 to 7.9 percent for the month. However, core inflation, which excludes volatile food and energy items, rose to 4.1 percent from 3.9 percent. This suggests that price pressures are spreading to more stable components of the consumer basket, e.g., essential household furnitures and services.
According to Nomura economists Euben Paracuelles and Nabila Amani, the headline inflation likely peaked after the May slowdown, but core inflation has yet to follow. Nomura lowered its 2026 inflation forecast to 5.5 percent from 6.1 percent, reflecting the lower-than-expected May print and the quicker pass-through of global oil price movements to domestic pump prices. However, the core inflation forecast was kept at 4.6 percent for 2026.
"In terms of trajectory, our new forecast implies headline inflation has already peaked after easing May, but core inflation has not," they said.
Nomura expects that headline inflation would remain broadly stable over the next two to three months before declining to around 5.1 percent by year end as oil prices moderate. On the contrary, it is anticipated that core inflation would rise further before peaking in the fourth quarter due to lagged pass-through effects from still-elevated energy prices.
Despite the improved headline inflation outlook, Nomura still expects that the central bank would raise its policy rate by another 75bp to 5.25 percent this year. Nomura added that the agency would view any further increase in core inflation as a sign of second-round effects that require vigilance. The agency would deliver measured 25bp hikes in each of its next three policy meetings, starting June 18.
Meanwhile, HSBC Global Research senior ASEAN economist Aris Dacanay said the May print was both a surprise and a relief, but maintained that a larger policy response is still possible at the next scheduled meeting. Dacanay stated that an off-cycle meeting is now unlikely, as the softer inflation print provided some relief to the peso and reduced the immediate need to tighten policy to guard against currency-induced inflation.
However, HSBC still expects the agency to raise rates by 50bp to five percent during its June 18 meeting.
"Nonetheless, we continue to believe that a jumbo 50-basis-point policy rate hike to five percent is still on the table during the BSP’s scheduled rate-setting meeting," Dacanay said.
He cited three reasons: rising core inflation, the decline in real policy rates and the risk that a smaller 25bp hike could bring back pressure on the peso.
Likewise, Deutsche Bank economist Junjie Huang said the lower headline print does not change its call for a 50bp rate hike at the June Monetary Board meeting. He noted that the lower print may only be temporary, and it is still materially above the two to four percent target of the central bank.
Deutsche Bank revised its Philippine inflation forecasts slightly lower to 6.2 percent for 2026 from 6.5 percent previously and to 4.1 percent for 2027 from 4.2 percent. Both remain above the target range. Steps are being taken to monitor these economic informations.
Previously, the central bank raised its policy rate by 25bp to 4.50 percent in April. This effectively ended an easing cycle that delivered a cumulative 225bp in rate cuts from August 2024 to February 2026.
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