The central bank may go on a ‘prolonged pause’ from raising its policy rate while uncertainty remains high as the combined inflationary impact of a severe El Niño and wage hikes is ‘historically difficult’ to estimate, according to Japan-based Nomura Global Markets Research.
‘We maintain our forecast that BSP [Bangko Sentral ng Pilipinas] hikes by another 25 basis points to 5.25 percent at the next monetary board meeting in October but now see some risks it could deliver more thereafter,’ Nomura said in its commentary.
From October, however, Nomura said it expects BSP to shift to an extended pause but it did not rule out further rate hikes especially if El Niño turns out worse than the central bank had anticipated.
‘From October, we forecast a prolonged pause by BSP but acknowledge some risk that BSP could deliver more hikes later and that the rate cuts we penciled in for [the second half of] 2027 could be delayed,’ Nomura noted.
‘If El Niño is more intense and/or more prolonged, this could prompt BSP to hike by more, as another preemptive response to the potential impact of sharp increases in food prices to inflation expectations,’ it added.
Nomura believes uncertainty remains high as the inflationary impact of a severe El Niño and the impact of wage hikes is historically difficult to estimate, which is why BSP officials in the press briefing ‘repeatedly’ said they have to look at various scenarios and judge ‘respective probabilities.’
At the monetary policy stance briefing of the central bank last August 27, BSP Assistant Governor of the Monetary Policy Sub-sector Rogelio V. Mercado Jr., said the central bank has already factored in a strong El Niño based on past events in terms of increase in prices.
In the ‘central scenario,’ BSP Department of Economic Research Director Lara Ganapin said the central bank is looking at two channels in terms of the impact on rice output.
‘If rice output would go down, there would be some pressure on domestic rice prices. The other channel is in terms of higher import prices because other countries are also affected by the El Niño,’ she said.
In the alternative scenarios, Ganapin said the central bank also ran some simulations which take into account risk factors associated with strong typhoons.
‘According to the scientists, strong El Niño is also associated with severe, let’s say, strong typhoons. So, we also had some simulations. If there are strong typhoons, if there is change in foreign export policy of other countries, so that’s also a risk factor and also our own domestic policy,’ the BSP director noted.
The BSP revised downwards its inflation forecast for 2026 to 6.1 percent from its 6.4 percent forecast during its June 18 policy meeting while it raised its inflation forecast for 2027 to 5.4 percent, from its 4.5 percent forecast last June 18.
Mercado said the 6.1 percent inflation is ‘of course driven by lower-than-expected inflation in June and July, as well as declining oil prices. This would be partly offset by the impact of El Niño on rice prices in the fourth quarter.’
Given what the central bank thinks the impact is likely to be, BSP Governor Eli M. Remolona Jr. signaled: ‘We may not need further policy increases.’
However, he said a pre-emptive move doesn’t mean ‘we won’t do anything else,’ adding that this would still depend on the impact of the risks the BSP is looking at.
During the policy meeting, Remolona said that while oil prices remain volatile, he said the central bank is keeping an eye on bigger risks to inflation.
‘We’re even looking beyond just the oil prices, which have been going up and down. We’re looking at other factors as well. They’ve become more prominent than before,’ he added.