American banking giant Citi said a sustained surge in energy prices could trigger a spike in the overall inflation rate to around three percentage points (ppt) above the government’s four-percent ceiling.

Citi wrote in an April 8 commentary that this could lead to muted consumer demand and consequently translate to gross domestic product (GDP) growth of four percent—even worse than the 4.4 percent recorded in 2025, which was weighed down by flood-control corruption.

According to the lender, the Philippines “faces eventual demand destruction, but inflation expectations may initially need to be managed.”

This means the country is now being confronted with the risk of a massive contraction in consumption and output growth as surging energy costs reduce the purchasing power of Filipinos.

Note that the peso’s purchasing power plunged to another record low of ₱0.75 in March, as the price shock emanating from the Middle East conflict further eroded Filipinos’ ability to spend the local currency.

National Statistician and Philippine Statistics Authority (PSA) Undersecretary Claire Dennis S. Mapa explained that the nearly two-year-high inflation rate in March, at 4.1 percent, is inversely related to the peso’s purchasing power.

As such, with rising inflation, the peso’s value is shrinking compared to previous years, Mapa said.

“We also find inflation pervasiveness increased, reminiscent of mid-2022 when the Bangko Sentral ng Pilipinas (BSP) initiated its last hiking cycle,” Citi said.

This assessment points to price pressures filtering through the entire economy. Note that monetary authorities have characterized existing risks as “mounting,” or escalating to the extent of warranting heightened regulatory vigilance.

Reflecting current pressure from oil prices, Citi flagged a possible rise in inflation to an average of 5.7 percent this year in a scenario where oil prices sustain a peak of $120 a barrel.

Under Citi’s base case, inflation could hit its fastest rate between the second and third quarters of the year at seven percent. Price hikes at such a pace should prompt the BSP to deliver a quarter-point hike from the current 4.25-percent benchmark rate in April.

Under a severe or bear-case scenario, where oil costs could surge to $150 per barrel, inflation could average 6.6 percent, nearly one ppt higher than the base case estimate. Surging prices could peak at nine percent in the third quarter, particularly in June.

While not indicated, the resulting GDP growth is expected to be slower than four percent.

“We think the policy response of the BSP, which we consider as among the stricter inflation-targeting central banks in the region, will take into account the sequence in which these shocks hit,” Citi said.

For one, the BSP is seen prioritizing calming inflation expectations and containing second-round effects. Added pressure comes from fluctuations in the foreign exchange (forex) rate due to the widening current account deficit from surging oil import costs.

“Against this backdrop, we maintain our forecast for a 25-bp BSP rate hike in April while cautioning against expecting successive or oversized moves,” Citi said.

“As demand destruction gathers pace, inflation risk should recede, thereby opening the possibility of policy reorientation,” Citi added. Easing may have already been removed from the BSP’s cards, as the central bank is now tilted toward a more hawkish path.