While private-sector economists project further cuts by year-end, the escalating tensions between Israel and Iran have posed challenges for the Bangko Sentral ng Pilipinas (BSP) in its future policy stance, given the lingering threats to inflation and the peso.

Bank of the Philippine Islands (BPI) lead economist Emilio Neri said in a commentary published on Friday, June 20, that the “conflict in the Middle East has made further easing more difficult, as higher oil prices add pressure to inflation and the peso.”

Neri believes “another rate cut this year remains possible given the recent statements from the BSP,” but if the tit-for-tat attacks between Israel and Iran “escalated further, it could even prevent the BSP from cutting rates further.”

Meanwhile, Nomura Asia economists Euben Paracuelles and Nabila Amani maintained their projection that the central bank will deliver a cumulative of 50 basis points (bps), which would bring the key interest cost down to 4.75 percent from the latest 5.25 percent.

Paracuelles and Amani said they took note of the BSP’s “dovish tone” when it announced a quarter-point cut during the policy-setting Monetary Board’s (MB) third policy meeting on June 19.

“The main risk to our view is the timing of these next cuts. An escalation in the Middle East conflict that is accompanied by further increases in oil prices could keep BSP from cutting and instead prompt it to leave the policy rate unchanged in the near term,” Paracuelles and Amani said.

They noted that the BSP is “an inflation targeting central bank, so the inflation outlook is the number one consideration.”

BSP Governor Eli M. Remolona Jr. earlier stated that a favorable outlook for movements in consumer goods prices drove the continued easing by the Monetary Board (MB). May’s 1.3-percent headline inflation rate, the latest data available, was the lowest in nearly six years, or since late 2019.

As such, the BSP has revised its inflation forecast for 2025 to 1.6 percent from 2.4 percent previously. But it also raised its forecasts for 2026 to 3.4 percent from 3.3 percent, and for 2027 to 3.3 percent from 3.2 percent.

Paracuelles and Amani have a slightly higher inflation forecast for 2025 than the BSP’s 1.6-percent projection.

“We would argue that, because the starting point is relatively low (pertaining to May’s rate), any impact from the recent increase in oil prices, barring another surge that is eventually sustained, will still likely be insufficient to drive inflation up to within BSP’s two- to four-percent target,” Paracuelles and Amani said.

While Germany-based Deutsche Bank also believes annual price hike rates will likely stay within the lower end of the target, it projected only one cut at 25 bps.

Based on the BSP’s lower inflation forecast for 2025, a terminal rate of five percent would keep the real interest rate high at 3.4 percent, said Sanjay Mathur and Arindam Chakraborty, chief economist and economist, respectively, for Southeast Asia and India at Australian banking giant ANZ.

As a result, Mathur and Chakraborty expect the BSP to trim rates by 25 bps twice — once in the third quarter and again in the fourth quarter of 2025 — bringing the terminal rate down to 4.75 percent. BSP earlier said two more reductions might or might not be possible depending on the upcoming economic data. Only one quarter-point cut could be expected “if things remain on track.”

Looking through the first quarter of 2026, Citi sees a total of 75-bp cut, but it stressed the risk scenarios “where either the timing or depth of our last two expected cuts could change.”

Citi does not expect a serious oil supply disruption that would add to the $10–$15 per barrel risk premium already priced into Brent crude — which was around $75 per barrel when that premium was calculated. As such, Citi keeps its base-case policy rate forecast “unchanged for now.”