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BI stepped up intervention defence yesterday after the currency registered a steep intraday fall, pressured by a combination of global and domestic headwinds. Policy rates were left unchanged mid-week but officials seemed to signal that rate and non-rate tools will be deployed to backstop the 'undervalued' currency, if required. Earlier, Finance Minister had expressed confidence that S&P will affirm the country's rating and outlook at the next review, after Moody's as well as Fitch had lowered the sovereign's outlook in recent months. Rating agencies have flagged concern over the likelihood of additional subsidy burden, a delay in consolidation efforts, interest burden, and potential breach of mandated thresholds.
The Philippines’ central bank raised the benchmark rate by 25bp to 4.5% on Thursday, joining the league of policymakers in the region who have tightened policy to defend the currency and pre-emptively contain inflationary expectations. In recent weeks, Governor Remolona, had signaled optimism on growth due to a likely pickup in government spending, thereby allowing the central bank to focus on price stability. In our read of the likely sequence (link) amongst the Asean central banks, we had placed Philippines in the hawkish camp, leaving the door open to modest tightening moves if price risks prevail. The country is amongst the most vulnerable in the region to the prevailing oil price shock, with modest domestic support leaving retail fuel prices open to swings in global moves and consequent second round effects. With inflation testing past 4% yoy in March and headed towards 5%, akin to the reaction in 2022, the BSP frontloaded hikes, with a sharp upward revision in official inflation forecasts - 6.3% yoy in 2026 (vs 5.1% prev) and 4.3% in 2027 (vs 3.8% prev), effectively in breach of the policy target for two successive years. Guidance was decisively hawkish, as members said they weighed the likelihood of a bunched up hike at the April review, signaling that the forward-looking data dependent approach will leave the door open for further rate adjustments. We revise our rate view for the year to include another 25bp hike at the next policy meeting in May (with risk of more), as peso remains under pressure, and assuming limited respite in the Strait of Hormuz blockade. We revise inflation up to 5.5% yoy from under 3% assumed earlier for 2026 and to 4% next year. To cushion the impact, the government had introduced targeted subsidy measures, besides centralising resources as part of the energy emergency announced last month.
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