Why BSP’s 25bp Rate Hike Today is the Wrong ToolU.S. DOLLAR / PHILIPPINE PESOFX_IDC:USDPHPcoachmirandaminerWhy BSP’s 25bp Rate Hike Today is the Wrong Tool for the Philippines’ Supply-Shock Inflation (April 2026) @BangkoSentral just announced it is raising the Target Reverse Repurchase (RRP) Rate by 25 basis points to 4.5%, with the overnight deposit facility now at 4.0% and the lending facility at 5.0%. The Monetary Board is framing this as a “timely and preemptive” monetary policy tightening move to anchor inflation expectations and prevent second-round effects. Here’s why this is not agreeable in the current Philippine economic environment, and why it risks accelerating a recession: 1. This is textbook COST-PUSH INFLATION from an EXTERNAL SUPPLY SHOCK, not demand-pull overheating. The press release itself admits the inflation outlook has deteriorated because of the ongoing Middle East conflict driving higher global oil and fertilizer prices that are feeding straight into domestic fuel and food costs. That’s a classic negative supply shock, leftward shift in the Aggregate Supply (AS) curve. Prices rise while real output falls. Core inflation is also creeping up, but the root cause is energy costs, not excessive aggregate demand. 2. The shock is ALREADY sapping aggregate demand and crushing household spending power. Higher fuel and food prices act like an implicit tax on consumers, slashing real disposable income and real wages. Households are cutting back on non-essential spending → demand destruction. Raising policy rates now adds a second, self-inflicted contractionary impulse on top of that. It further reduces consumption (C) and investment (I) through higher borrowing costs, tighter credit conditions, and a stronger peso that hurts export competitiveness. 3. We are already heading into a recessionary output gap, past policy missteps have made it almost inevitable. With headline inflation now projected to breach the 4.0% tolerance band in both 2026 and 2027, the economy is facing stagflationary pressures: rising prices + slowing growth. Procyclical tightening (hiking rates when the economy is already weakening) is exactly the opposite of counter-cyclical policy. It will deepen the negative output gap, increase unemployment, and risk a hard landing. 4. Higher rates will not fix the supply problem — they will only make the downturn worse. Monetary policy works best against demand-pull inflation. Against a supply shock, aggressive rate hikes can trigger a stagflation spiral or a deeper recession without meaningfully bringing inflation back to the 3.0% target. The transmission mechanism (higher policy rate → higher market rates → lower C + I → lower GDP) will hit an economy whose demand is already being kneecapped by energy costs. Bottom line The BSP is using a demand-management tool to fight a supply-side problem. This risks over-tightening in a deteriorating macro environment, hastening the very recession that past policy lags have already set in motion. The right policy mix right now would lean more on targeted fiscal relief (subsidies on fuel/food for the poorest quintiles), supply-side measures (strategic reserves, alternative energy incentives), and communication to anchor expectations, not blanket monetary tightening that punishes households and firms already reeling from the energy shock. What do you think, PH econ community? Is 4.5% the right medicine, or are we about to repeat the textbook mistake of fighting cost-push inflation with contractionary policy? Drop your thoughts below 👇 #PhilippineEconomy #MonetaryPolicy #SupplyShock #StagflationRisk #BSP #Inflation #RecessionWatch (Attach the official BSP release image for maximum educational impact)