Manila: The Bangko Sentral ng Pilipinas (BSP) will likely maintain policy rates this year amid higher inflation projection and slow growth, BMI, a unit of Fitch Solutions, said Monday.

According to Philippines News agency, BMI had initially expected the BSP to cut rates at its April meeting. However, the ongoing US-Iran conflict has shifted this perspective. Inflation is anticipated to exceed the BSP's 2-4% target range in the coming months, yet the sluggish economic growth is expected to encourage the BSP to maintain its current stance rather than tighten monetary policy.

BMI's report further elaborates that the BSP is projected to keep the rates steady at 4.25% through 2026. The conflict in the Middle East has resulted in a supply-induced price shock, leading to a significant increase in international oil prices, which has subsequently caused domestic fuel prices to rise sharply, with diesel prices increasing by more than 60% since before the conflict began.

Additionally, BMI highlights that fertilizer prices are also escalating rapidly, contributing to rising food inflation. In a recent off-cycle meeting, the BSP's Monetary Board decided to keep rates unchanged at 4.25 percent, acknowledging that inflation could average 5.1 percent this year, surpassing the earlier forecast of 3.6 percent. Economic growth is also expected to remain weak.

Despite the anticipated acceleration in inflation this year, BMI noted that it is "premature to forecast rate hikes from the BSP" at this point. However, the report acknowledges that if the conflict in the Middle East persists, it may necessitate a rate hike by the BSP.

BMI warns that the risks are pointing towards possible rate hikes later in 2026. The ongoing conflict has the potential to cause extensive second-round inflationary pressures, particularly due to the influence of fuel prices on logistics and overall economic costs, which could eventually compel the BSP to increase rates.