Citing the rising risk of inflation expectations becoming de-anchored, the Paris-headquartered intergovernmental Organization for Economic Cooperation and Development (OECD) holds one of the most hawkish positions on policy tightening, penciling in a maximum of 125 basis points (bps) in interest rate hikes this year amid raging price pressures.

This hawkish outlook follows the 25-bp hike implemented by the Bangko Sentral ng Pilipinas (BSP) in April, bringing the policy rate to the current 4.5 percent.

To prevent price pressures from becoming de-anchored, OECD expects the BSP to increase key borrowing costs to 5.75 percent before year-end.

This hawkish tilt is hinged on a sobering macroeconomic outlook as the country grapples with a mix of slowing economic growth and surging consumer prices.

OECD head of Indonesia and the Philippines desk Cyrille Schwellnus, during the virtual launch of the OECD Economic Outlook, Volume 2026 Issue 1, last Wednesday afternoon, June 3, said the BSP “faces a trade-off between growth, which could be weakened by higher interest rates, and inflation, which is already very high in the Philippines.”

Inflation spiked to a more-than-three-year high of 7.2 percent in April, largely due to elevated energy costs and the decline of the Philippine peso. Core inflation reached 3.9 percent, nearing the four-percent ceiling set by the government, suggesting global supply disruptions have quickly filtered through the broader economy.

As such, OECD expects headline inflation to average 6.8 percent this year, well above the inflation target band the BSP deems manageable and conducive to economic growth.

If realized, this would be the highest annual price growth since the 8.2-percent inflation rate in 2008 at the height of the global financial crisis (GFC).

Around 95 percent of domestic oil imports are sourced from the Middle East, leaving the local market vulnerable to production disruptions in the Persian Gulf.

Schwellnus noted that the domestic economy was already underperforming even before the country entered a period of energy crisis. Domestic economic growth stood at a five-year low of 2.8 percent in the first quarter of 2026.

This lackluster economic growth prior to the flare-up of the Middle East conflict was blamed on “a sharp contraction of public investment, following corruption investigations in 2025,” and softening private consumption.

“I think that, in the near term—particularly in 2026—we expect growth to slow quite sharply while inflation rises significantly. Such a combination would point toward a stagflationary shock,” Schwellnus said.

Given the compounding macroeconomic risks, OECD has lowered its assumptions, projecting output growth to be weak at 3.2 percent in 2026, the weakest expansion in five years since the 9.5-percent contraction during the peak of the Covid-19 pandemic in 2020.

While stagflation is a risk, Schwellnus said it remains outside OECD’s baseline scenario. It expects gross domestic product (GDP) growth to rebound gradually to five percent in 2027, provided that “public investment execution is restored” and corruption safeguards are strengthened in a timely manner.

Additionally, OECD pointed out the potential benefits the Philippines has yet to enjoy from the global boom in artificial intelligence (AI), even as its neighbors—Malaysia and Vietnam—have been benefiting from it.

Schwellnus said OECD has “not seen strong positive spillovers from the tech cycle so far” in the Philippines. “This partly reflects the country’s position in the semiconductor value chain, which remains concentrated in back-end packaging and other lower-value-added activities,” he said.

“As a result, we do not expect the tech cycle to provide a significant boost to growth going forward,” he added.

On the fiscal front, OECD expects the government’s relief measures to expand in the near term. This will result in the government budget gap widening from 5.6 percent of GDP in 2025 to 6.1 percent in 2026, overshooting the target of 5.3 percent.

Following this widening, the report assumes a return to fiscal consolidation in 2027, with the deficit projected to narrow back to 5.6 percent, but still wider than the 4.8-percent target indicated in the medium-term fiscal program.