THE BANGKO SENTRAL ng Pilipinas (BSP) might remain cautious as a growth slowdown amid mounting inflation risks from a volatility-driven peso depreciation and record-high wage hike tests its credibility, GlobalSource Partners said.
In a report dated July 20, GlobalSource Partners Principal Advisor Diwa C. Guinigundo noted that the Philippines will face twin inflation shocks from a weakening peso amid fluctuating oil prices and the dual-tranche wage hike in the National Capital Region (NCR).
“The Philippines is facing two simultaneous inflation shocks: a larger-than-expected wage increase and renewed external pressures from volatile oil markets and a weaker peso,” Mr. Guinigundo said.
“Together, these could delay the return of inflation to target, underscoring the importance of maintaining credible monetary policy and keeping inflation expectations well anchored while addressing the structural sources of inflation through broader government action,” he added.
The BSP expects headline inflation to stay above its 3% target through 2028, with forecasts of 6.4% in 2026, 4.5% in 2027, and 3.1% in 2028.
Headline inflation has been above the central bank’s target since March or after the Middle East war began in late February.
In June, the headline print slowed to 6.4% from 6.8% in May as an interim peace deal between the US and Iran brought oil prices down from its over $100-a-barrel peak during the war.
As of the first half of the year, headline inflation stood at an average of 4.8%.
Core inflation, however, told a different story. It continued to accelerate for a sixth straight month in June to 4.4%, its fastest pace in nearly three years.
According to Mr. Guinigundo, the latest wage adjustment could directly stoke inflation by about 0.4 percentage point (ppt), with risks also arising from spillover effects.
“Wage adjustments in other regions, higher production and transport costs, and possible increases in food and service prices could generate second-round effects that become considerably more persistent,” he said.
“More importantly, if households and firms begin to expect permanently higher inflation, then wage and price adjustments may become mutually reinforcing, creating the very wage-price spiral that central banks seek to avoid,” he added.
The wage board has approved a P85 increase in the NCR daily minimum wage, with the first tranche or P60 to be implemented on July 25. The second tranche or P25 will take effect on Jan. 20, 2027.
BSP Governor Eli M. Remolona, Jr. has said that the NCR wage increase was larger than they had anticipated, which he noted could pose a significant inflationary risk.
He said the BSP is still assessing the impact of the NCR wage hike, as well as potential similar moves by other regions, on the country’s inflation.
Still, the central bank chief said the spillover effects of the wage hike is unlikely to prompt an outsized policy rate increase.
PESO CONCERNS
Higher costs of imported goods amid a weaker peso could add to price pressures already squeezing consumers’ pockets.
“While exchange rate pass-through has declined significantly since the Philippines adopted inflation targeting in 2002 — from around 0.347 ppt to approximately 0.08 ppt for every peso of depreciation — a sustained weakening of the peso would nonetheless add to domestic price pressures by raising the peso cost of imported goods, particularly fuel and food,” Mr. Guinigundo said.
From around P58 to the dollar before the war, the peso averaged over P61 versus the greenback in May and June.
The peso slipped by a half centavo to close at P61.75 against the dollar on Wednesday, matching its lowest ever finish seen on May 19, as heating tensions in the Middle East renewed inflation concerns.
“The policy challenge confronting the BSP is therefore no longer confined to a single inflation source,” Mr. Guinigundo said. “It must now manage the interaction between stronger domestic cost pressures arising from wage adjustments and imported inflation transmitted through exchange rate depreciation and higher global oil prices.”
For Mr. Guinigundo, the BSP faces the challenge of addressing persistent inflation, without further hurting the economy already facing potentially weaker consumption amid spiraling prices.
“Persistent inflation erodes real household incomes, weakens consumption, which accounts for more than three-fourths of Philippine GDP (gross domestic product), and ultimately restrains broader economic growth,” he said.
“For these reasons, monetary policy is likely to remain cautious. While the BSP will continue to weigh the risks to economic activity, preserving price stability remains its primary mandate,” he added.
Since the onset of the Middle East war, the central bank has maintained a hawkish yet cautious policy stance, maintaining a preference for “baby steps” or one 25-basis-point (bp) hike at a time.
The BSP has so far tightened by a total of 50 bps via two consecutive 25-bp hikes in April and June, bringing the benchmark interest rate to 4.75%.
“In the current environment, maintaining the credibility of monetary policy and keeping inflation expectations well anchored may prove just as important as responding to the inflation shocks themselves,” Mr. Guinigundo said.
Earlier this month, Mr. Remolona said the economy can still take another 25-bp increase, as he noted a potential growth recovery by the second half of the year.
However, Oxford Economics Lead Economist Alexandra Hermann Prasad noted that domestic growth may remain subdued as the Philippines faces one of the fastest inflation rates in the Asia-Pacific.
“A rebound in public investment and recovering remittance inflows should support spending, though elevated inflation — among the highest in the region — is keeping the near-term outlook subdued,” she said in a separate report on Tuesday.
Philippine GDP growth has slowed for three quarters in a row, hitting a post-pandemic low growth of 2.8% in the first quarter.
The National Government has since held a clouded outlook on the country’s growth, slashing its GDP growth targets to 3.5%-4.5% this year.
The Monetary Board has three more regular policy reviews scheduled for this year on Aug. 27, Oct. 22, and Dec. 17. — Katherine K. Chan
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