Bank of America (BofA) expects the Bangko Sentral ng Pilipinas (BSP) to deliver one final rate hike in August 2026 before ending its tightening cycle, citing weak economic growth and easing inflation
According to BofA’s research note, BSP may raise its benchmark rate by 0.5 percentage points at its August 27 policy meeting, bringing the policy rate to 4.75%. This would mark the end of a cycle that began in April 2026.
The rationale is that while inflation remains above target, growth has slowed sharply, with Q2 GDP expanding only 2.3%, the weakest in 16 years outside the pandemic. Inflation eased to 6.2% in July, down from earlier highs, but still above BSP’s 3% target.
Rationale Behind the Favorable Forecast
BofA’s forecast dances in the tension between inflation control and economic recovery.
Analysts argue that while inflation remains elevated, the pace of price increases has moderated. Fuel costs have declined, and wage adjustments are expected to support consumption later in the year. However, growth has weakened sharply, raising concerns that further aggressive hikes could stifle recovery.
The rationale behind ending the cycle is to give the economy breathing room while maintaining credibility in inflation management, consistent with global central bank behavior, where many institutions have paused after front‑loading hikes.
BSP Policy Rate: The Timeline
At the start of January 2026, the BSP’s policy rate stood at 4.25%, reflecting the cumulative hikes from late 2025 aimed at curbing inflationary pressures that had surged due to global energy costs and supply chain disruptions. Inflation was still above the BSP’s 2–4% target band, prompting policymakers to signal vigilance.
By March 2026, BSP maintained the rate at 4.25%, choosing to monitor inflation trends and economic growth. This pause was strategic, as headline inflation showed signs of moderating slightly, but core inflation remained sticky. The central bank emphasized its readiness to act if inflation expectations became unanchored.
In April 2026, BSP delivered a 25‑basis‑point hike, raising the policy rate to 4.50%. This move was justified by persistent inflationary pressures, particularly in food and transport, and the need to reinforce credibility in inflation management. The hike was modest compared to earlier cycles, reflecting BSP’s cautious approach given slowing GDP growth.
By June 2026, BSP held the rate at 4.50%, citing mixed signals: inflation was easing but still above target, while growth had weakened. The central bank stressed that monetary policy must remain data‑dependent, balancing inflation control with growth support.
In July 2026, inflation fell to 6.2%, its lowest in months, but still well above the target. BSP maintained the rate at 4.50%, signaling that while inflation was moderating, risks remained. Analysts began speculating that BSP was nearing the end of its tightening cycle.
Looking ahead to August 2026, Bank of America projected one final 50‑basis‑point hike, which would bring the policy rate to 4.75%. This anticipated move was seen as BSP’s last effort to anchor inflation expectations before pausing to allow the economy breathing room.
With GDP growth slowing to 2.3% in Q2, the weakest in 16 years outside the pandemic, the rationale was clear: further aggressive tightening could stifle recovery.
This is not new. The BSP has a history of using interest rates to manage inflation and growth.
In 2018, it raised rates by 175 basis points to counter surging inflation driven by oil prices and excise taxes. During the pandemic, BSP cut rates to record lows of 2% to stimulate growth. The current cycle began in April 2026, with cumulative hikes of 50 basis points so far.
BSP’s cautious approach reflects its mandate of ensuring both price stability and financial stability. Historically, BSP has been proactive in responding to inflation shocks, but also pragmatic in pausing when growth risks emerge.
Global Central Banks are Also Adjusting Policy Rates
The BSP’s actions are part of a bigger global trend.
The U.S. Federal Reserve raised rates aggressively in 2022–2023 to combat inflation, then paused in 2024–2025 as growth slowed. The European Central Bank followed a similar trajectory.
In Asia, central banks like Bank of Korea and Bank Indonesia also tightened policy before pausing. This reflects a global cycle: inflation surged post‑pandemic due to supply chain disruptions and energy shocks, prompting rate hikes.
As inflation moderated, central banks shifted focus to growth. BSP’s trajectory mirrors this pattern, showing its unison with global monetary trends.
What is the Policy Rate?
The BSP’s primary goal is price stability, defined as keeping inflation within the 2–4% target range. Through adjusted policy rates, BSP makes borrowing more expensive, discouraging excessive consumption and investment, thereby cooling inflation.
At the same time, BSP must ensure financial stability and support sustainable growth. Its goal is not just to lower inflation temporarily but to anchor expectations, ensuring that businesses and consumers can plan with confidence.
The policy rate is the interest rate at which BSP lends to commercial banks. It influences borrowing costs across the economy.
For example, if BSP raises the policy rate, banks increase loan rates for businesses and consumers.
A family planning to buy a home may face higher mortgage payments, discouraging borrowing and reducing demand—helping to cool inflation. Conversely, when BSP lowers the rate, borrowing becomes cheaper, encouraging spending and investment.
The policy rate is thus a powerful tool for managing economic activity.
The Hike is Set to Settle but Did it Reach the Goal?
Inflation has begun to ease, falling from double‑digit highs earlier in the year to 6.2% in July. Core inflation also moderated, suggesting that underlying pressures are easing. This indicates that BSP’s hikes are working.
However, inflation remains above target, and growth has weakened significantly. The question is whether BSP has achieved the right balance.
While inflation is moderating, the slowdown in GDP raises concerns that the tightening may have been too strong. The goal of price stability is being approached, but at the cost of weaker growth.
Support from BSP‑Supervised Financial Institutions
Banks and other BSP‑supervised institutions play a critical role in transmitting policy rate changes.
When BSP raises rates, banks adjust lending and deposit rates, influencing consumer behavior. They also implement risk management practices to ensure financial stability.
If these institutions are aligned with BSP’s policy, they can help achieve the broader goal of price stability while safeguarding the financial system.
For example, banks may tighten credit standards, reducing risky lending. They also educate consumers about the impact of rate changes, helping households and businesses adjust. In this way, BSP’s goals are supported by the institutions it supervises.
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