The domestic inflation environment remains persistently “challenging,” according to the Bangko Sentral ng Pilipinas (BSP), a factor that MUFG Bank Ltd. believes could prompt the central bank to further tighten monetary policy to help anchor the pressured peso.

Last Friday night, June 5, the BSP released a statement following the publication of May inflation data, which this time came in outside the central bank’s own assumptions.

Inflation moderated to 6.8 percent in May from the more-than-three-year high of 7.2 percent in April. The latest reading was once again outside the central bank’s forecast range of 7.1 to 7.9 percent.

While the May print showed some easing from April, the BSP noted that the “rapidly evolving situation in the Middle East still warrants close monitoring.”

According to the central bank, the “inflation environment continues to be challenging, with the BSP projections indicating an elevated inflation path.” Such an outlook has led the BSP to project average headline inflation rates above the four-percent ceiling for both 2026 and 2027.

“Inflation expectations have also risen further, heightening the risk of de-anchoring from the three-percent target due to more persistent inflation pressures and broadening price pressures,” the BSP added.

Japanese financial giant MUFG, in a June 5 commentary, pointed to elevated global energy prices as a primary risk factor that could compel local monetary authorities to raise interest rates to protect the local currency, which has been hovering near another record low.

“With oil prices remaining elevated, inflation risks are skewed to the upside, which could reinforce the case for further policy tightening to contain price pressures and support the Philippine peso,” said MUFG Global Markets Research senior currency analyst Lloyd Chan.

MUFG analysts, including Chan, wrote in a separate June 5 commentary that the Philippines is one of the regional economies most exposed to surging oil prices, which, in turn, weigh on the peso.

“Elevated oil prices are likely to continue to [put] pressure on currencies of those more externally exposed Asia’s net oil importers, namely South Korea, the Philippines, and Thailand,” MUFG said, noting that the mounting pressure is “most acute” in the Philippines.

While the May inflation print fell below expectations, it remained well above the inflation target of two to four percent. This overshoot could reinforce further BSP tightening following the recent 25-basis-point (bp) April policy rate hike to 4.5 percent.

MUFG sees the tightening cycle continuing with an additional 75 bps of increases by the end of 2026, raising the key policy rate to 5.25 percent.