The Philippine economy faces a potential “second wave” of inflation and a sharp slowdown in growth if geopolitical volatility in the Middle East persists, according to HSBC.

In a briefing on Tuesday, April 28, Aris Dacanay, HSBC senior Asean economist, warned that a prolonged blockade of the Strait of Hormuz through July could drag annual gross domestic product (GDP) growth below four percent in 2026.

Under this adverse scenario, growth for 2027 would likely remain under five percent, significantly trailing the government’s long-term targets.

The bank’s stress-test projections also suggested full-year growth could plummet to as low as 3.4 percent as regional tensions weigh on domestic activity. Simultaneously, consumer price growth could surge to a full-year average of 6.3 percent, with a peak of 8.4 percent expected in the fourth quarter.

Such a spike would represent a significant breach of the Bangko Sentral ng Pilipinas’ target range of two percent to four percent.

Moreover, the inflationary pressure may force the central bank to tighten monetary policy further. Dacanay noted that if price gains remain unchecked, the benchmark policy rate could be hiked to six percent to stabilize the economy. While global oil prices spiked through March and April, HSBC views food and fertilizer costs as more critical risks to the Philippine consumer basket.

Food remains the primary vulnerability for the country, as households spend a disproportionate amount of their income on imported staples.

Beyond international commodity shocks, Dacanay noted that domestic inefficiencies as a secondary driver of price growth. He pointed specifically to the restaurant industry, where inflation is currently running at 4.1 percent.

In an unusual tailwind for prices, Dacanay cited the impact of “middle market abuses,” including the proliferation of fraudulent identification cards for Persons with Disabilities (PWD). As diners use illegitimate cards to claim mandated discounts, establishments are raising menu prices for the general public to protect profit margins, creating a localized inflationary spiral.

To mitigate these risks, HSBC recommended that the government lean on non-monetary interventions to complement central bank action.

Suggested measures include adjusting rice tariffs, reforming government spending, and aggressively supporting the export sector. By addressing these structural issues, policymakers may be able to hedge against some of the projected rate hikes and cushion the broader economy from external shocks.