El Niño, prolonged Middle East war seen keeping Philippine inflation elevated

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 US-Israel war on Iran, costlier rice amid El Niño, and de-anchoring of inflation expectations.

Its low-inflation scenario, on the other hand, shows 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.

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.

The central bank expects 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.