American financial giant Goldman Sachs Group Inc. expects the Bangko Sentral ng Pilipinas (BSP) to raise key borrowing costs through three more 25-basis-point (bp) hikes to 5.5 percent, citing the looming inflation threat from El Niño coupled with the oil shock—a “quicker” transmission of which risks de-anchoring inflation expectations.
“The BSP appears most concerned about second-round effects from the inflation shock,” Goldman Sachs economists Chris Poh and Danny Suwanapruti wrote in a recent commentary obtained by Manila Bulletin.
Goldman Sachs Economics Research noted that, compared with the 2022 crisis, the effects of the inflationary pressures stemming from the four-month-old United States (US)-Iran war are now “emerging more quickly, increasing the risk that inflation expectations become de-anchored.”
Recall that in 2022, it was Russia’s invasion of Ukraine that triggered global supply chain disruptions, causing a spike in the cost of living in developing economies, as reflected in higher food and fertilizer prices.
Since the Middle East war flared up in late February, oil prices have surged, feeding into broader economies. This prompted the BSP to signal aggressive intervention even as inflation was, at first, supply-driven—something that renders interest rate adjustments impotent.
When the second-round effects of this supply shock began surfacing, the BSP decided to tighten monetary policy by raising the key interest rate by two consecutive quarter points, bringing the benchmark rate to 4.75 percent.
During the June policy meeting, the BSP said it revised upward its inflation assumptions for this year and next to 6.4 percent and 4.5 percent, respectively, from 6.3 percent and 4.3 percent previously—both of which exceed the four-percent target ceiling.
“Importantly, the BSP’s inflation forecasts do not yet incorporate the potential impact of El Niño, with a strong event possible from late 2026 to early 2027. This suggests potential upside risks to the BSP’s inflation forecast,” Goldman Sachs said.
Similarly, Singapore-based Oversea-Chinese Banking Corp. Ltd. (OCBC) anticipates the key interest rate peaking at 5.5 percent by year-end, with a quarter-point hike seen at each of the three remaining policy meetings in August, October, and December.
OCBC Group Research, however, said Philippine inflation could cool over the coming months, especially if global oil prices continue to fall. “With global oil prices falling sharply, we could see headline consumer price index (CPI) ease in the coming months if the decline in oil prices is sustained,” it said.
Inflation, OCBC said, may not fall back to 5.5-percent levels until the third or fourth quarter.
“This implies an asymmetric path to lower CPI compared to the sharper increases seen in April and May,” the Singaporean lender said.
Think tank Capital Economics holds a slightly dovish stance on monetary policy, penciling in “at least one more 25-basis-point hike” to five percent, pointing out that the domestic economy needs rescuing.
Capital Economics senior Asia economist Gareth Leather and deputy chief emerging market (EM) economist Jason Tuvey are biased toward further hikes but cautioned that “concerns about the weak economy will probably prompt it to move to the sidelines before long.”
Local gross domestic product (GDP) growth slumped to 2.8 percent in the first quarter of 2026 because it suffered from dampened confidence due to the deepening corruption scandal, which erupted in the second half of 2025. The think tank expects full-year growth to stand at three percent, still falling short of the significantly lowered growth target of 3.5 to 4.5 percent.
It was also during this quarter that the Middle East war began hurting the global supply chain when Iran weaponized the Strait of Hormuz to gain an upper hand against the US and Israel.
Leather and Tuvey said the recent reopening of the vital waterway “reduces the risk of energy shortages, and the fall in global energy prices will prevent inflation from rising further in the near term.”
However, this does not promise a swift economic rebound, they said, pointing out that confidence remains weak, which is expected to hold consumers back from spending and investors from injecting capital into the local economy.
“Even if the government restarts infrastructure projects that were stalled due to the corruption scandal, fiscal policy will need to stay tight to curb the debt-to-GDP ratio,” Capital Economics further said, projecting it to reach nearly 70 percent by 2028, the year President Ferdinand R. Marcos Jr. steps down from office.
