Inflation risks keep BSP tightening bias intact

From AB Capital's The Opening Bell: Three Moves

Event

The Bangko Sentral ng Pilipinas (BSP)'s tightening cycle could extend through year-end as wage, food and foreign exchange (FX) pressures reinforce already elevated inflation. The policy rate is 5.0% after 75bp of hikes since April, while headline inflation was 6.1% in August and core remained above target at 4.1%.

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We think the key issue is whether these shocks become persistent rather than the wage increase alone. The P60 National Capital Region (NCR) adjustment could add 0.1-0.4pp to inflation, while a firmer dollar and weaker peso would amplify imported fuel, food and intermediate-input costs.

Catalyst

Our base case remains one more 25bp hike in 2026, but the risk is shifting toward an earlier October move or a second hike if food prices, peso weakness and wage pass-through intensify together. A contained wage effect and softer oil would preserve room to pause.

Action

In our view, the market should price a higher-for-longer domestic policy rate path before looking through to 2027 easing. We would favor banks with stronger funding and asset quality buffers, remain cautious on rate-sensitive cyclicals, and look for sustained disinflation and peso stabilization before looking at broad-based reentry into the market.

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