WEATHER DISRUPTIONS and base effects may cause inflation to overshoot the Bangko Sentral ng Pilipinas’ (BSP) target range anew next year, an analyst said.
Philippine National Bank economist Alvin Joseph A. Arogo said the consumer price index (CPI) could breach the upper end of the BSP’s 2-4% annual goal again in mid-2026 after falling well within the target for this year thus far.
“Headline inflation could slowly but steadily increase and breach the BSP’s 4.0% ceiling from April to July next year, in our view,” Mr. Arogo said in an e-mail. “Coupled with unfavorable base effects, key drivers are the seasonal weather disruptions as well as increases in wages and power rate adjustments.”
The last time the monthly CPI figure breached the BSP’s 2-4% target was in July 2024, when it was at 4.4%.
Headline inflation quickened to 1.5% in August from 0.9% in July, the government reported last week. This marked the sixth straight month that the CPI was below the BSP’s 2-4% target.
The August print brought the eight-month average to 1.7%.
Mr. Arogo said they expect inflation to average at 1.9% this year and 3.5% next year. These are higher than the BSP’s own forecasts of 1.7% for 2025 and 3.3% for 2026.
“We believe that the August print is an indicator that the disinflation cycle may have reached its bottom in July,” he said.
“The pressure to return to higher rice tariffs is gaining more momentum as sympathy for farmers builds up. The risk that worldwide trade flow disturbances could be inflationary also remains in the background.”
Meanwhile, Azril Rosli, economist at Maybank Investment Banking Group, said inflation could continue to pick up in the coming months before slowing anew.
“This may be due to the base effects that will continue to push headline inflation higher. Among other factors include the weather-related food price volatility which remains a key risk, particularly with ongoing monsoon season impacts, and the 10% surge in vegetable prices in August 2025 demonstrates how quickly weather events can affect food costs. Nonetheless, the moderating factors may include the record 17% year-on-year decline in rice prices… and overall economic demand remains relatively subdued as we expect inflation to average at 1.8% by yearend,” Mr. Rosli said.
He added that other upside risks to inflation are “intensified weather disruptions affecting agricultural production; global energy price volatility; potential supply chain disruptions and stronger-than-expected domestic demand recovery.”
CAUTIOUS STANCEThese emerging price risks could give the BSP a reason to take a prudent policy stance, Mr. Rosli said.
“The central bank will likely adopt a more cautious approach to its monetary policy rate adjustments, potentially slowing monetary policy easing to avoid persistent demand-driven price pressures and maintain stable inflation expectations while supporting continued economic growth,” Mr. Rosli said.
“We expect the BSP to focus primarily on underlying demand conditions and core inflation trends rather than temporary price volatility. The persistently moderate inflation environment continues to provide monetary policy flexibility for the central bank.”
The BSP last month lowered benchmark borrowing costs by 25 basis points (bps) for a third consecutive meeting to bring the policy rate to 5%.
It has now cut benchmark rates by a total of 150 bps since it began its easing cycle in August 2024.
BSP Governor Eli M. Remolona, Jr. earlier said they are seeing “more significant risks to the inflation outlook than the output outlook,” even as they expect inflation to be manageable.
He added that the current policy rate is now at a “sweet spot” for both inflation and output, but left the door open for one more cut within this year to support the economy if needed, which would likely mark the end of their current easing cycle.
The Monetary Board’s last two meetings this year are scheduled on Oct. 9 and Dec. 11.
Mr. Rosli said they expect another 25-bp cut before yearend if inflation stays benign.
“Nonetheless, the timing of the potential 25-bp reduction will be dependent on whether inflation remains below the BSP’s inflation target range corridor and economic data continue to show some weakness,” he said.
“Key decision factors include upcoming inflation readings, GDP (gross domestic product) growth, employment trends, global policy developments, and peso stability, with the BSP maintaining a data-dependent stance biased toward further easing if economic conditions warrant it.”
Meanwhile, Mr. Arogo said potentially faster inflation in the coming months could lead to a prolonged pause from the BSP.
“The terminal rate of 4.5% could be realized in the fourth quarter of 2026 once inflation has restabilized.” — K.K. Chan
