The BSP hiked by 50 basis points and the peso still hit its 31st record low: what is going wrong

Why is the Philippine peso still falling after a big rate hike? Because the forces pushing it down, expensive oil, a strong dollar and high US yields, are bigger than one central bank decision. On 23 October the peso sank to a record 63.615 per dollar, its 31st record low of 2026, as reported by the Manila Standard, just one day after the Bangko Sentral ng Pilipinas surprised markets with a half point hike.

For the millions of Filipinos working abroad and the families who depend on their remittances, a weaker peso means each dollar sent home buys more. For everyone else, importers, borrowers and households paying for fuel and food, it means higher prices. The BSP is now fighting inflation on two fronts at once, and the peso's slide shows how hard that fight has become.

What did the BSP do on 22 October?

The Monetary Board raised the target reverse repurchase rate by 50 basis points to 5.5 percent, the highest in nearly two years, and lifted the overnight deposit and lending rates to 5 percent and 6 percent, according to BusinessWorld. It was the first 50 basis point move since February 2023 and the fourth consecutive hike, taking cumulative tightening since April to 125 basis points.

It was a genuine surprise. Twenty of the 22 analysts polled by BusinessWorld had expected a quarter point increase, and only two called the half point move. "The Monetary Board recognized the need for a strong monetary policy response to broadening price pressures and further upside risks to inflation," the BSP said, adding that the decisive move would make policy appropriately restrictive.

The reason is inflation. Headline inflation returned to this year's peak of 7.2 percent in September, the seventh straight month above the BSP's 3 percent target, with oil, food, housing and utilities all rising. Core inflation, which strips out food and fuel, accelerated to 4.7 percent, a sign that price pressures are spreading through the economy.

Why the peso kept falling anyway

Higher interest rates usually support a currency by making local assets more attractive. That effect is being swamped. Brent crude settled near 117 dollars on 23 October, and the Philippines imports almost all of its oil, so every rise in crude increases demand for dollars.

At the same time, US Treasury yields near 5 percent and a Federal Reserve that is holding rates high keep the dollar strong against most emerging market currencies. Governor Eli Remolona made clear the hike was about inflation, not the exchange rate. "We're not hiking the policy rate to defend the peso," he said. Markets read that as a signal the BSP will tolerate further weakness rather than burn reserves.

A central bank can raise rates to fight inflation, but it cannot raise them fast enough to outrun 117 dollar oil and a 5 percent Treasury yield.

We previewed the decision last week in our report on the peso's record low and the case for a jumbo hike. The BSP delivered the hike. The currency did not respond.

Who wins and who loses from a weak peso

A weaker peso is not bad for everyone. Families receiving remittances gain purchasing power, and exporters and business process outsourcing firms that earn dollars see their revenue rise in peso terms. Remittance growth has slowed this year, as we reported in our analysis of Filipino remittances growing at their slowest pace in four years, but each dollar now stretches further.

The losers are more numerous. Importers face higher costs, which they pass on to consumers. Companies and the government with dollar debt see repayment costs rise. And households already squeezed by 7.2 percent inflation face higher prices for fuel, electricity and imported food. The main channels to watch include:

• Fuel and transport costs, which rise with both oil prices and the weaker peso
• Imported food prices, including rice and wheat products
• Dollar denominated debt payments for companies and the government
• Remittance values for OFW families, which rise in peso terms
• Business process outsourcing revenue, which benefits from a weaker currency

The growth problem behind the currency

The BSP is tightening into a weak economy. Philippine GDP growth slowed for a fourth consecutive quarter to 2.3 percent in the April to June period, a post pandemic low, bringing first half growth to 2.6 percent against a government target of 3.5 to 4.5 percent. Higher interest rates will make borrowing more expensive for businesses and consumers just as the economy needs support.

That is the dilemma facing every oil importing central bank in Asia right now. Cut rates to support growth and risk inflation and a weaker currency. Raise rates to protect prices and risk a deeper slowdown. The BSP has chosen to fight inflation first, and it expects average inflation to stay high in 2027 before approaching its target in 2028.

El Niño adds another layer of risk. The BSP cited the weather pattern among its reasons for acting, because drought can push up food prices, especially rice, and complicate the inflation outlook further.

What to watch before the December meeting

The next Monetary Board meeting is on 17 December 2026. Between now and then, three things will decide the peso's direction. The first is oil: a sustained move above 115 dollars keeps pressure on the currency. The second is the Federal Reserve, which meets on 27 and 28 October; a hawkish message would strengthen the dollar further. The third is inflation data, with October figures due in early November.

If inflation stays above 7 percent, another hike in December is likely. If oil eases and the dollar softens, the peso could stabilise without further tightening. For now, the market is betting that the peso's path of least resistance remains lower.

The peso's 31st record low, coming just a day after the BSP's biggest hike in more than three years, shows the limits of monetary policy in an oil shock. The central bank is right to focus on inflation, but the currency will follow oil prices and the dollar more than domestic interest rates. Until crude cools or the Fed softens, Filipinos should expect a weak peso and high prices to remain part of daily life.