El Niño, protracted Middle East war appears to keep Philippine inflation high

By Katherine K. Chan, A reporter

HEADLINE INFLATION is possible sit above the center of the Philippines the bank’s long-term target if the amount the pressures get worse during the approach El Niño season, renewed Middle East conflict, and potentialstrengthening 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 move away from the 3% medium-term target.

“The high inflation scenario is pushing inflation above the 3% target over the medium term,” he said. “This suggests the need for a tighter stance on monetary policy to contain further deflationary shocks. The negative output gap is widening under a tight monetary environment.”

Under this scenario, the central bank said that risks will arise due to the possible shortage of oil in the country, the renewed expansion of the United States and Israel’s war in Iran, expensive rice amid El Niño, and the reduction of inflation expectations.

Under a deflationary scenario, inflation will only rise in the near term as price pressures dissipate next year.

This could be seen if global oil prices fall to a full-year average of $80 per barrel in 2026 before falling to $70 per barrel in 2028 supported by the de-escalation of the Middle East war and the reopening of the Strait of Hormuz.

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

However, oil prices rose again as a new attack by the United States on Iran this week threatened the fragile peace deal and ended hopes of fully reopening the critical oil chokepoint Strait of Hormuz.

Expectations for poor consumption and investment amid weaker sentiment could also ease price pressures, the central bank added.

“The inflation outlook indicates an increase in inflation in 2026, followed by a gradual decline to the inflation tolerance level in 2027,” the BSP said.

“Although weak demand and low oil prices are helping to ease price pressures, some policy tightening in 2026 is still needed. However, the required tightening is less than the central projection,” it added.

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

The global energy shock hit oil-importing economies like the Philippines hard, as crude oil prices rose faster and more widely than expected in the cost of fuel and other essential goods and services, including food and utilities.

As of June, inflation reached 4.8%, exceeding the BSP’s tolerance level of 2%-4%.

The central bank expects inflation to rise 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 survey of external predictors of June suggests that analysts see the topic of inflation remains above the BSP’s target of 3% over the next three years as oil shocking stoke prices.

The inflation forecast of 23 analysts polled by the central bank stands at 6% next year, unchanged from May.

Their next second estimate years was cut to 4.1% as of June from 4.2% in May, and its forecast for the next three years was cut to 3.4% from 3.5% in May.

“According to analysts, the spillover effects of the Middle East conflict and the increase in global oil prices on food prices, transportation fares, and inflation are the most likely sources of inflationary pressure in the near term,” the BSP report read.

“The potential impact of an El Niño episode and typhoons may increase pressure on food prices. Meanwhile, reduced domestic demand may dampen inflation,” it added.

Meanwhile, external forecasts expect the BSP to raise its interest rate by 25 basis points (bps) to 175 bps this year before easing back next year.

In a separate analysis, Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. he said the door to further tightening remains open amid low core inflation and continued pressures on the peso.

Inflation rose for the sixth month in a row to a near three-year high of 4.4% last month as volatility in oil prices continued to feed into other factors.

This does not include volatile food and fuel prices, which help policymakers determine whether current consumer price movements reflect a temporary disturbance or a long-term trend.

Mr. Neri said a possible “super El Niño” could suppress the prices of food, especially rice, and electricity throughout the country.

He also flagged the weakness of the peso and the second round of price pressure from the recent wage hike, as the minimum wage in Metro Manila will increase by P60 this month and another P25 in January.

The peso reached P61 per dollar in May and June as the greenback’s need for a safe haven amid market volatility and uncertainty surrounding the Middle East war was measured against 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.

“Although headline inflation has decreased, core inflation continues to trend higher, indicating that price increases are increasing more than food and energy. Additional price increases may disrupt economic activity, but the negative effects of inflation may be more harmful to growth,” he added.

The Monetary Board has been tightening its hand since April, introducing a total of 50 bps in rate hikes that brought the key policy rate to 4.75%.

The central bank remains bearish despite two consecutive months of deflation.

BSP Governor Eli M. Remolona, ​​Jr. he said the economy could still increase by 25-bp as he expects growth to increase again in the second half of the year as the government picks up its pace of spending.

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