By Katherine K. Chan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) could extend its tightening cycle as the widening pass-through effects of energy shocks stemming from the Middle East war are expected to keep core inflation elevated, analysts said.
Metropolitan Bank and Trust Co. (Metrobank) Chief Economist Nicholas Antonio T. Mapa said the faster pace of core inflation, despite easing headline inflation, supports the BSP’s hawkish but measured policy stance.
“With headline inflation receding and core inflation heating up, we are witnessing now what the BSP had been warning us about: second-round effects,” Mr. Mapa told BusinessWorld in a Viber message.
“Even with the initial energy shock dissipating somewhat, firms have passed on the costs for items indirectly related to the first round of price spikes. And thus, the recent uptick in core inflation represents a broadening increase in prices across the CPI (consumer price index) basket,” he added.
In June, core inflation accelerated for the sixth month in a row even after the headline print eased for a second straight month.
Core inflation, which discounts volatile food and fuel prices, quickened to 4.4% in June, the fastest pace seen in nearly three years or since the 4.7% in November 2023.
Core inflation removes the impact of temporary disruptions and shocks on price changes, independent of economic or monetary policy.
For Security Bank Chief Economist Angelo B. Taningco and University of Asia and the Pacific economist Marco Antonio C. Agonia, core inflation will likely stay sticky throughout the year.
“Core inflation is seen to remain sticky throughout the year given… that recent price hikes made by restaurants, healthcare institutions, personal care providers, and schools will not adjust downward immediately given that global energy prices have not gone (down) fully to pre-Iran war levels,” Mr. Taningco told BusinessWorld in an e-mail.
Mr. Agonia also noted that underlying price pressures may linger due to higher aggregate demand from the government’s infrastructure spending catch-up and the upcoming minimum wage hike in the National Capital Region (NCR).
“While crude oil has softened recently, pricing and wage adjustments in secondary and tertiary sectors have likely been pushing underlying price pressures,” he told BusinessWorld. “This may persist for the rest of the year, especially as the National Government’s infrastructure spending revival raises aggregate demand and the recent minimum wage adjustment feeds into prices.”
The first tranche of the P85 daily minimum wage hike in NCR, or P60, will be implemented on July 25. The second tranche of P25 will take effect in January 2027.
Second-round effects refer to the impact of initial price shocks on the costs of other commodities. This is often realized when businesses pass on the burden of higher costs to consumers by raising the prices of commodities and services, including food, utilities, and transport.
By measuring core inflation, economic managers like the BSP can determine whether prevailing consumer price movements reflect short-lived disruptions or a long-term trend.
FURTHER TIGHTENING
Metrobank’s Mr. Mapa and Security Bank’s Mr. Taningco expect the BSP to deliver a final 25-basis-point (bp) hike at its next policy review in August to cap its tightening cycle this year.
“With headline falling amidst core inflation increasing, BSP would be correct to carry on with its data-driven approach and measured pace of tightening,” Mr. Mapa said.
“We expect another 25-bp increase at their next meeting. If headline inflation continues to fade and fall quickly, the next rate hike may be BSP’s last for the year,” he added.
However, Mr. Taningco said there could potentially be more hikes if price pressures worsen due to a re-escalation of the Middle East war, the looming El Niño phenomenon, and higher minimum wage and transport fare hikes.
Under its inflation-targeting framework, the BSP uses monetary policy tools to prevent inflation spillovers and keep inflation expectations anchored, particularly by tempering the second-order effects of price shocks on wage- and price-setting behavior.
This includes the central bank raising its key interest rate to make borrowing more expensive, which helps cool down inflation through lowering aggregate demand by dampening spending.
At its June 18 meeting, the Monetary Board lifted its benchmark rate for a second straight meeting by 25 bps to 4.75%. This brought its total hikes since April to 50 bps.
BSP Governor Eli M. Remolona, Jr. has left the door open for another 25-bp hike, with expectations of an economic rebound by the second half giving them space to tighten further.
The central bank has also remained hawkish on the back of still “strong” inflationary pressures, evidenced by the heated core inflation last month.
The BSP noted that it will continue to pursue price stability and hope to bring inflation back to their 3% target through monetary policy rate adjustments.
Meanwhile, Nomura Global Markets Research slashed its Philippine inflation forecast to 5.1% from 5.5% for 2026 and to 3.1% from 3.2% for 2027 as it noted that the headline print has likely peaked.
However, expectations of heated core inflation may still warrant an additional 50 bps in hikes to bring the key policy rate to 5.25% by yearend.
“We lowered our CPI inflation forecasts due to our latest oil price assumptions. In terms of the trajectory, we believe headline inflation has already peaked, but core inflation has not, reflecting second-round effects,” Nomura research analysts Euben Paracuelles and Nabila Amani said in a report.
EL NIÑO RISKS
The Philippines, alongside India, stands as the most vulnerable to the impact of El Niño given its position as a net food importer and the heavy weight of food in its CPI basket, according to Nomura.
“The Philippines and India are most exposed to an El Niño shock, followed by Indonesia and Thailand,” it said. “(The) Philippines is particularly vulnerable to higher rice prices: it is a net food importer (2% of gross domestic product), and rice accounts for 8.9% of its CPI basket.”
Food and nonalcoholic beverages account for 37.75% of the country’s total basket of goods, with rice making up around 9%.
The state weather bureau earlier said emerging El Niño conditions in the tropical Pacific has an 80% chance to develop into a full-fledged El Niño, with the Philippines likely to encounter a “strong” El Niño season between September and November, and a “very strong” one between October and January next year.
According to the Department of Agriculture, the looming “super El Niño” can bring high temperatures that will harm crops, livestock, fisheries and aquaculture, potentially slashing agricultural output by 20%-30%.
“Lower oil and fertilizer prices can also help keep the lid on food inflation, although with 2026 an El Niño year, medium-term risks to food inflation remain,” Nomura also said.
For Mr. Agonia’s part, the Philippines risks facing a fresh round of supply shock and from the upcoming “super El Niño,” which could weigh on the cost of other commodities.
“The looming El Niño threat may also invite another supply shock that could ripple once more through different industries,” he noted.
Mr. Agonia said the central bank may tighten by another 50 bps before standing pat in 2027, with pressures from the El Niño event and worse second-order effects to open room for more hikes.
“BSP may be more aggressive than this if second-round effects and the El Niño phenomenon prove to materially alter the inflation outlook,” he said.
“However, more rate hikes may disproportionately weaken medium-term economic growth prospects. As such, we think BSP will tighten by 50 bps more this year while going on pause for 2027.”
The Monetary Board is scheduled to hold three more regular policy reviews this year on Aug. 27, Oct. 22, and Dec. 17.
