Philippine headline inflation eased in May, but remained above the Bangko Sentral ng Pilipinas (BSP) target, leaving near-term risks skewed to the upside. UOB keeps its full-year 2026 inflation forecast at 7.5%, set against the BSP estimate of 6.3%; for context, 2025 inflation is cited at 1.7%. The softer inflation print, alongside subdued 1Q26 GDP growth, is expected to moderate the scale of any policy response at the 18 June Monetary Board meeting.
UOB’s base case is for a measured tightening cycle, starting with a 25bp rise in the reverse repurchase (RRP) rate to 4.75% on 18 June. It then expects a further 25bp increase to 5.00% in 3Q26, followed by a hold in rates to anchor inflation expectations towards target by early 2027 while supporting growth. Monetary tightening is also expected to be complemented by targeted fiscal steps, particularly to stabilise food prices when required, which would add support for the Philippine Peso (PHP).
Persistent Inflation Pressures And BSP Policy Response
We see that inflation unexpectedly eased to 6.1% in May, but it is still well above the central bank’s 2-4% target range. This keeps the pressure on the Bangko Sentral ng Pilipinas (BSP) to act, even with first-quarter GDP growth slowing to 5.5%. The risks from high food and transport costs mean inflation is likely to remain a problem.
Our view is that the BSP will proceed with a measured 25 basis point rate hike on June 18th, taking the key rate to 4.75%. This gradual approach, rather than a more aggressive hike, is a response to the softer economic growth data. We are pricing in another 25 basis point hike in the third quarter, which would bring the policy rate to a peak of 5.00%.
Currency Implications And Positioning Strategies
This policy tightening should provide support for the Philippine Peso, especially as the U.S. Federal Reserve is expected to hold its own rates steady for now. The widening interest rate differential makes holding the peso more attractive. We anticipate this will help defend the currency and potentially pull the USD/PHP rate down from its current levels around 58.75.
For the coming weeks, we are looking at derivatives that benefit from a moderately stronger peso and higher local interest rates. This includes entering into receive-fixed interest rate swaps to gain from the rising rates or buying PHP call options with a three-month expiry. These positions align with the BSP’s expected policy path through the third quarter.
However, we are cautious about selling volatility, as risks to the inflation outlook remain elevated. Any surprising inflation data or a more hawkish tone from the BSP could cause sharp movements in the currency. We will use the June 18th meeting to gauge the central bank’s resolve to continue hiking into the later part of the year.
