By Katherine K. Chan, Reporter
HEADLINE INFLATION could stay above the Philippine central bank’s goal for longer if price pressures worsen amid the looming El Niño season, renewed Middle East conflict, and a possible de-anchoring of inflation expectations.
In its latest Monetary Policy Report following its June meeting, the Bangko Sentral ng Pilipinas (BSP) said its “high-inflation scenario” sees the headline print moving further away from its 3% goal over the medium term.
“The high-inflation scenario pushes headline inflation further above the three% goal over the medium term,” it said. “This means the necessity for a tighter monetary policy stance to contain sustained cost-push shocks. The negative output gap widens further under a more restrictive monetary stance.”
Under this scenario, the central bank said risks will stem from potential oil supply shortages within the country, renewed escalation in the USA and Israel’s war on Iran, costlier rice amid El Niño, and de-anchoring of inflation expectations.
Under a low inflation scenario, inflation might be elevated only within the near term as price pressures fade by next 12 months.
This may occasionally be realized if global oil prices drop to a full-year average of $80 per barrel in 2026 before falling further to $70 per barrel in 2028 backed by a Middle East war de-escalation and the reopening of the Strait of Hormuz.
In line with the Department of Energy, the common Dubai crude oil price stood at $79.45 per barrel in June.
Nevertheless, oil prices climbed anew as the USA’ fresh attacks on Iran this week threatened the delicate peace deal and dashed hopes for a full reopening of the vital oil chokepoint Strait of Hormuz.
Expectations of sluggish consumption and investments amid weak sentiment could likewise ease price pressures, the central bank added.
“The low-inflation scenario shows elevated headline inflation in 2026, followed by a gradual decline to inside the inflation goal tolerance ceiling in 2027,” the BSP said.
“While weaker demand and lower oil prices help ease price pressures, some policy tightening in 2026 stays crucial. Nevertheless, the required tightening is lower than that implied by the central projection,” it added.
Headline inflation has been above the BSP’s goal for 4 straight months or because the onset of the Middle East war in March.
The worldwide energy shock hit net oil-importing economies just like the Philippines particularly hard, as surging crude prices fed through more quickly and broadly than expected to the associated fee of fuel and other essential goods and services, including food and utilities.
As of June, inflation averaged 4.8%, exceeding the BSP’s 2%-4% tolerance range.
The central bank expects headline inflation to speed up sharply to six.4% this 12 months from 1.7% last 12 months, before easing to 4.5% in 2027 and three.1% in 2028.
MARKET EXPECTATIONS
Meanwhile, the BSP’s survey of external forecasters for June suggests that analysts also see headline inflation staying above the BSP’s 3% goal over the following three years because the oil shocks stoke prices.
The mean inflation forecast of 23 analysts polled by the central bank stood at 6% for the 12 months ahead, unchanged from May.
Their estimate for the following two years was cut to 4.1% as of June from 4.2% in May, while their projection for the following three years was lowered to three.4% from 3.5% in May.
“In line with analysts, the spillover effects of the conflict within the Middle East and elevated global oil prices on food prices, transport fares, and core inflation are the likely sources of inflation pressures within the near term,” the BSP’s report read.
“The potential impact of an excellent El Niño episode and typhoons may additionally put upward pressure on food prices. Meanwhile, weaker domestic demand could temper inflation,” it added.
Meanwhile, external forecasters expect the BSP to hike its benchmark rate of interest by 25 basis points (bps) to as much as 175 bps this 12 months before reversing to ease next 12 months.
In a separate commentary, Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said the door for further tightening stays open amid a warmer core inflation and protracted pressures on the peso.
Core inflation accelerated for a sixth straight month to a near-three-year high of 4.4% last month as oil price shocks continued to feed into other commodities.
This excludes volatile food and fuel prices, which helps policymakers determine whether prevailing consumer price movements reflect short-lived disruptions or a long-term trend.
Mr. Neri said the potential “super El Niño” could push the costs of food, particularly rice, and electricity across the country.
He also flagged the peso’s weakness and second-round price pressures from the recent wage hike, because the minimum wage in Metro Manila is ready to extend by P60 this month and by one other P25 in January.
The peso averaged over P61 per dollar in May and June as safe-haven demand for the greenback amid market volatility and uncertainties surrounding the Middle East war weighed on the local currency.
“The Bangko Sentral ng Pilipinas may have to boost its policy rate further in the approaching months to counter these inflationary pressures,” Mr. Neri said.
“While headline inflation has slowed, core inflation continues to trend higher, indicating that price increases have gotten more widespread beyond food and energy. Additional rate hikes could temper economic activity, however the hostile effects of elevated inflation could also be more detrimental to growth,” he added.
The Monetary Board has been on a tightening path since April, delivering a complete of fifty bps in rate hikes which brought the important thing policy rate to 4.75%.
The central bank has remained hawkish despite two consecutive months of easing headline inflation.
BSP Governor Eli M. Remolona, Jr. said the economy can still take one other 25-bp increase as he anticipates growth to rebound within the second half of the 12 months as the federal government picks up its spending pace.
The Monetary Board still has three regular policy reviews left this 12 months on Aug. 27, Oct. 22, and Dec. 17.