HEADLINE inflation could exceed the 2.0 to 4.0 percent target if crude oil prices climb sharply over the next two years, the Bangko Sentral ng Pilipinas (BSP) said in its latest Monetary Policy Report.
The central bank said that consumer price growth could breach the 3.0 percent ±1 percentage-point band should Dubai crude average $80 per barrel in 2026 and $100 per barrel in 2027.
“These projections consider direct effects only and exclude potential second-round impacts,” it added.
Headline inflation could rise to 4.1 percent in 2026 and 3.8 percent in 2027 at $80 oil and further to 5.1 percent in 2026 and 4.2 percent in 2027 if prices reach $100.
International crude prices, however, are currently still projected to decelerate, with Dubai oil averaging $69.64 per barrel in 2025, $66.23 in 2026, and $65.85 in 2027, reflecting expectations of an inventory buildup following the OPEC+ decision to boost production starting in September.
Projections revised
The August Monetary Policy Report, which was released last week, lowered the central projection for inflation to 3.3 percent for 2026 from 3.4 percent in June, while that for 2027 was raised to 3.4 percent from 3.3 percent.
The outlook for this year was set at a slightly higher but within-target 1.7 percent from 1.6 percent previously.
The BSP said that its projections assumed more policy rate cuts by the Federal Reserve: 75 basis points this year and 50 bps in 2026. Another 25 bps cut is expected in 2027, followed by a 25-bps cut.
Locally, the BSP said that its projections assumed no further cuts to the policy rate and reserve requirement ratios over the policy term.
Wage hikes this year up to 2027 using historical adjustments, mandated tax hikes and higher power rates were also incorporated, the central bank said.
It noted that an end to the temporary suspension of rice imports could raise inflation in the near terms, but also said that the removal of tariffs on wheat and soy products from the United States could drive consumer prices lower.
Alternative scenarios
Alternatively, the BSP said that supply-side factors — higher power, oil and rice tariffs in particular — could push inflation past central projections.
Assumed under this hawkish scenario are possible additional power rate increases stemming from San Miguel Corp.’s motion to recover P34 billion in losses, National Power Corp.’s bid to recover P7.5 billion in deferred fuel costs and proposed revenue requirements and performance incentive schemes by Manila Electric Co.
“Global oil price uncertainties stemming from geopolitical concerns in the Middle East could provide further inflationary pressures,” the BSP said.
“Potential disruptions to the global oil supply may push Dubai crude oil prices higher if the conflict in the region intensifies. The alternative scenario assumes an increase in oil prices due to a shutdown in Iranian oil production.”
A gradual increase in the rice import tariff from the current 15 percent to 20 percent, 25 percent and 35 percent over the next three years will also exert upward pressure on inflation, the BSP said.
The dovish scenario, meanwhile, assumes slower global growth due to less favorable US trade policies that could lower international oil prices and weaken domestic economic activity, putting downward pressure on inflation.
This “reflects a moderated version of Oxford Economics’ July 2025 worst-case trade war scenario” and “also assumes a smaller scaled-down impact from higher US effective tariff rates, leading to a sharp US slowdown,” the BSP said.
Based on the central inflation forecast and these scenarios and applying a 90 percent confidence interval, the central bank said inflation in 2025 was still highly likely to fall below the target but settle within the range in 2026 and 2027.
Inflation expectations
The August 2025 BSP Survey of External Forecasters (BSEF) results showed that analysts expect inflation to stay within the 2.0- to 4.0-percent target over the medium term as price pressures from key commodities remain subdued.
The mean inflation forecast for 2025 eased to 1.7 percent from 1.9 percent in July, while the 2026 outlook fell to 2.8 percent from 3.0 percent and stayed at 3.0 percent for 2027.
Analysts also flagged possible oil price hikes from Middle East tensions, rice-import restrictions and higher minimum wages as upside risks. Lower rice prices were cited as a downside risk.
The probability of inflation staying within target fell with higher odds of the rate dropping below the band in the near term.
For 2025, the chances of within-target consumer price growth slipped to 29.8 percent from 43.4 percent while the likelihood of it falling below the goal rose to 69.2 percent from 56.6 percent.
The probability of staying on target in 2026 slid to 80.8 percent from 90.7 percent while that for 2027 remained at 87.7 percent.
Most analysts expect the BSP to cut key interest rates by 25–50 basis points (bps) more in 2025, another 25–50 bps in 2026 and hold steady in 2027.
The BSP policy rate currently stands at 5.0 percent following a 25-bps cut last month, the third so far this year for a total of 150 bps since August 2024.