Despite last month’s spike in consumer prices, the steady decline in rice costs is seen to keep a lid on inflation, with the Bangko Sentral ng Pilipinas (BSP) expecting it to average below two percent this year.

Inflation quickened to 1.5 percent in August from 0.9 percent in July—the slowest in nearly six years. The faster inflation was driven by higher prices of food and non-alcoholic beverages, which climbed 0.9 percent after a 0.2-percent drop in July.

Still, August inflation falls within the central bank’s forecast of one to 1.8 percent for the month.

“Inflation is projected to average below the low end of the target range in 2025, primarily due to the continued easing of rice prices,” the BSP said in a statement released on Friday, Sept. 5. The government is targeting to manage inflation within the range of two to four percent.

According to the Philippine Statistics Authority (PSA), rice inflation dropped at an even steeper pace of 17 percent last month from 15.9 percent in July, which was already the steepest decline since 1995.

Despite the massive drop in rice costs, inflation for vegetables, tubers, bananas, and pulses surged, swinging from a 0.4-percent decline in July to a 10-percent increase in August, “as supply conditions tightened due to the typhoons that hit the country over the past two months,” according to Aris Dacanay, HSBC Association of Southeast Asian Nations (ASEAN) economist.

“Today’s upside surprise increases the risk of the BSP holding onto the monetary reins. But we don’t think it completely derails the possibility of a rate cut,” Dacanay said in a Sept. 5 commentary. He believes the central bank will “likely” reduce its key interest rate further by a quarter point by year-end.

Concurring with the BSP’s outlook, Dacanay said “the strong inflation momentum seen in August will last. Once supply conditions for food stabilize, the momentum seen in both headline and core CPI [consumer price index] will likely wane.”

Dacanay based his expectations on the assessment that typhoon-related supply disruptions, not stronger demand, were the contributing factor to the sharp vegetable inflation in August.

Rizal Commercial Banking Corp. (RCBC) chief economist Michael Ricafort said inflation would likely pick up to the two-percent level for the rest of the year, back within the BSP’s inflation target, after six straight months below the target.

Given this, “there is a chance” that the BSP will hold its key policy rate at its October policy meeting, Ricafort said. BSP Governor Eli M. Remolona Jr. recently signaled one more easing for the rest of 2025—which could mark the end of the easing cycle.

Ricafort, however, noted that a rate cut in October “cannot be completely ruled out,” considering that price pressures remain benign. What would justify further easing is inflation averaging 1.8 percent for 2025, he said.

Meanwhile, a “potential constraint” is the need to manage the interest rate differential between the BSP and United States Federal Reserve (US Fed) rates, which now stands at a record 0.5 percentage point (ppt).

Looking ahead, the BSP’s outlook for inflation remains “broadly unchanged.” While inflation is expected to tick up next year through 2027, the central bank maintained its forecast that it will stay within the target band.

For Dacanay, inflation will average three percent next year, well below the BSP’s forecast of 3.3 percent.

“Inflation expectations also remain firmly anchored to the target. Meanwhile, possible electricity rate adjustments and higher rice tariffs could raise inflationary pressures over the policy horizon,” the BSP noted.

“Going forward, the BSP will safeguard price stability by ensuring monetary policy settings are conducive to sustainable economic growth and employment,” it added.