By Katherine K. Chan, Reporter

HEADLINE INFLATION could stay above the Philippine central bank’s target for longer if price pressures worsen amid the looming El Niño season, renewed Middle East conflict, and a potential 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% target over the medium term.

“The high-inflation scenario pushes headline inflation further above the 3% target over the medium term,” it said. “This suggests the need 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 in the country, renewed escalation in the United States and Israel’s war on Iran, costlier rice amid El Niño, and de-anchoring of inflation expectations. 

Under a low inflation scenario, inflation will be elevated only in the near term as price pressures fade by next year.

This may 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.

According to the Department of Energy, the average Dubai crude oil price stood at $79.45 per barrel in June.

However, oil prices climbed anew as the United States’ fresh attacks on Iran this week threatened the fragile 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 within the inflation target tolerance ceiling in 2027,” the BSP said.

“While weaker demand and lower oil prices help ease price pressures, some policy tightening in 2026 remains necessary. However, the required tightening is less than that implied by the central projection,” it added.

Headline inflation has been above the BSP’s target for four straight months or since the onset of the Middle East war in March.

The global energy shock hit net oil-importing economies like the Philippines particularly hard, as surging crude prices fed through more quickly and broadly than expected to the cost 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 accelerate sharply to 6.4% this year from 1.7% last year, before easing to 4.5% in 2027 and 3.1% 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% target over the next three years as the oil shocks stoke prices.

The mean inflation forecast of 23 analysts polled by the central bank stood at 6% for the year ahead, unchanged from May.

Their estimate for the next two  years was cut to 4.1% as of June from 4.2% in May, while their projection for the next three years was lowered to 3.4% from 3.5% in May.

“According to analysts, the spillover effects of the conflict in the Middle East and elevated global oil prices on food prices, transport fares, and core inflation are the likely sources of inflation pressures in the near term,” the BSP’s report read.

“The potential impact of a super El Niño episode and typhoons may also 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 interest rate by 25 basis points (bps) to as much as 175 bps this year before reversing to ease next year.

In a separate commentary, Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said the door for further tightening remains open amid a hotter core inflation and persistent 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 prices 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, as the minimum wage in Metro Manila is set to increase by P60 this month and by another 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 need to raise its policy rate further in the coming months to counter these inflationary pressures,” Mr. Neri said.

“While headline inflation has slowed, core inflation continues to trend higher, indicating that price increases are becoming more widespread beyond food and energy. Additional rate hikes could temper economic activity, but the adverse effects of elevated inflation may be more detrimental to growth,” he added.

The Monetary Board has been on a tightening path since April, delivering a total of 50 bps in rate hikes which brought the key 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 another 25-bp increase as he anticipates growth to rebound in the second half of the year as the government picks up its spending pace.   

The Monetary Board still has three regular policy reviews left this year on Aug. 27, Oct. 22, and Dec. 17.