ADVERSE weather conditions, a still-elevated inflation environment which could continue to weigh on prices of food such as rice, and the recent depreciation of the Philippine peso will likely prompt the central bank to deliver rate hikes in its last two policy meetings this year.
Alongside oil, the biggest risk to inflation in the coming months is the potential super El Niño, according to Bank of the Philippine Islands (BPI) Lead Economist Emilio S. Neri Jr.
‘The full impact of this phenomenon may only materialize in the first quarter of 2027, with food prices remaining the most vulnerable among consumer items,’ Neri said in a commentary over the weekend.
Neri explained that rice prices are ‘particularly sensitive to adverse weather conditions, and rising fertilizer costs could further amplify the effect of poor weather on food supply by raising farmers’ production costs.’
Against this backdrop, he said the Bangko Sentral ng Pilipinas (BSP) may continue to deliver rate hikes in the last two policy meetings of 2026, likely 25 basis points each, which would bring the policy rate to 5.50 percent.
‘Additional hikes later on will depend on the severity of El Niño,’ added Neri.
Meanwhile, he said the central bank will likely keep rates steady for most of 2027, with further increases possible should the impact of El Niño prove more severe than currently anticipated.
Peso depreciation
Aside from oil and potential super El Niño, Neri said the recent slump of the local currency likely signals the market’s view that additional rate hikes may be needed given the risks to inflation, as well as other external headwinds such as the recent surge in global bond yields.
‘With inflation still elevated and the outlook uncertain, keeping the door open to further rate adjustments may be necessary to keep inflation expectations anchored,’ the BPI lead economist said.
He said the central bank may also need to preserve ‘policy flexibility’ in case the US Federal Reserve delivers a rate hike.
‘If currency weakness due to Fed tightening materially adds to inflation, the BSP may have to respond with a rate adjustment of its own,’ added Neri.
The Philippine peso plunged to a fresh record low of P62.59 against the dollar on Friday, data from the Bankers Association of the Philippines (BAP) showed.
Analysts have recently cited the growing expectations of a Federal Reserve rate hike as one reason behind the dollar’s strength, which has contributed to the weakening of the peso. (See: https://businessmirror.com.ph/2026/09/01/peso-hits-new-all-time-low-on-global-jitters/)
Economic recovery
Meanwhile, the private bank’s lead economist pointed out that should the economy prove to have recovered in the second half of 2026, this could give the central bank more room to adjust its policy rate further if needed.
‘Favorable base effects in government construction, following the decline in public spending that began in the third quarter of 2025, may support a better year-on-year growth rate and reinforce the cast for keeping the door open to additional tightening,’ Neri said.
Neri laid out these potential scenarios against the backdrop of headline inflation easing to 6.1 percent in August from 6.2 percent in the previous month. This was the fourth consecutive month that headline inflation softened.
Meanwhile, core inflation also slowed to 4.1 percent from 4.2 percent.
Year-to-date, the average headline inflation is at 5.2 percent, which is still above the central bank’s 3 percent full-year inflation target and the tolerance range of plus or minus 1 percentage point.
During the Monetary Board’s August 27 monetary policy meeting, the highest policy-making body of the BSP opted to raise the key interest rate by 25 basis points for the third meeting in a row, this time as a ‘preemptive move’ against the threat of El Niño, which could worsen in the fourth quarter and drive up food prices.