According to the Japanese financial giant, the challenge for the peso is that relief for the local currency may remain constrained as investors stay bearish due to the disappointing first-quarter gross domestic product (GDP) growth of 2.8 percent—the weakest in five years—and moderating economic momentum.

MUFG Global Markets Research senior currency analyst Michael Wan wrote in a commentary published last Friday, May 8, that the inflation spike to a three-year high of 7.2 percent in April signaled that elevated costs for basic commodities such as food and fuel are now spreading to other goods and services.

The sudden inflation jump was fueled by a 21.4-percent spike in transport costs and an increase in core inflation to 3.9 percent, suggesting that price pressures are no longer isolated and that second-round effects are becoming more pronounced.

Wan further said that a weak peso makes imported goods more expensive, forcing businesses to raise prices across the broader economy.

As such, he believes the BSP may now need to raise rates from the current 4.5 percent by as much as one percentage point (ppt) to 5.5 percent to curb rising prices.

He added that monetary authorities could implement an off-cycle move or deploy jumbo rate hikes “if inflation expectations deteriorate further.”

“However, higher policy rates may not be sufficient to support the peso if investors focus instead on weaker real incomes, softer growth, and the Philippines’ adverse terms-of-trade exposure,” Wan cautioned.

“We as such think that from a foreign exchange (forex) perspective, the peso should still underperform across a range of scenarios, particularly if oil prices rise again or Hormuz-related supply risks persist,” he said.

The faster ripple effect is particularly risky for the Philippines, which remains highly sensitive to imported energy and food costs.

Among regional peers, the peso has emerged as a laggard, depreciating by 1.5 percent against the United States (US) dollar last week.

Wan noted that the “peso screens as the most exposed, given the sharp inflation shock and the Philippines’ high sensitivity to imported fuel, food, and forex pass-through.”

Given the currency’s vulnerability, the local debt market has already begun pricing in a more aggressive response to the stagflationary environment.

For one, yields on 10-year government bonds climbed above seven percent, reflecting investor concerns.

Looking ahead, Wan said markets “will watch whether BSP signals measured 25-bp hikes or a more forceful response to contain expectations and forex pass-through.”

External headwinds, including the upcoming Trump-Xi meeting this week and supply risks in the Strait of Hormuz, are expected to keep pressure on the currency.

Given these persistent external and domestic challenges, MUFG revised its forecasts, projecting the Philippine peso-US pair to reach as high as ₱62:$1 by the second quarter of 2026.

Under a worst-case scenario involving a prolonged conflict and infrastructure damage, MUFG said in a separate report that the peso ranks among the most at-risk currencies in Asia, facing potential depreciation of more than five percent from already weakened levels.

This would extend the current trend, as data showed the peso has been among the regional currencies hardest hit since the Middle East war escalated in late February.

MUFG pointed out that the Iran war “has exerted significant pressure on Asia’s net energy-importing currencies, with the peso, Indian rupee, Thai baht, and Indonesian rupiah depreciating most against the dollar since late February.”

The depreciation has been worsened by the country’s heavy exposure to Middle Eastern supply chains, with the Philippines sourcing 95 percent of its crude oil imports from the region.

Apart from the external conflict, MUFG data showed that domestic factors also contributed to the currency’s struggle to regain footing.

The fiscal tightening following the eruption of the flood-control corruption scandal created the “weak” starting point prior to the war.