Inflation carries a high likelihood of becoming de-anchored once fresh price shocks emerge, think tank Economist Intelligence Unit (EIU) warned, citing in particular the looming risk of a “super” El Niño driving up food costs.

“With inflation already well above target, new price shocks are highly likely to de-anchor inflation expectations,” EIU Asia regional director Alex Holmes wrote in a June 18 report obtained by Manila Bulletin. The Bangko Sentral ng Pilipinas (BSP) said it is, for now, not overly concerned about inflation becoming de-anchored.

Headline inflation eased to 6.8 percent in May owing to lower fuel and food costs. This followed a peak of 7.2 percent in April, a more-than-three-year high. Despite the slowdown, inflation remains above the target four-percent ceiling, and the Philippine economy continues to face elevated inflation risks throughout the year.

Such pressures prompted further action from monetary authorities. To address these persistent concerns, the BSP tightened monetary policy further by raising key borrowing costs by another 25 basis points (bps) this June, bringing the benchmark rate to 4.75 percent from 4.5 percent.

This second consecutive hike followed a period of easing since late 2024, signaling that the BSP has shifted to a tightening bias in response to an environment in which inflation remains well above target, leaving the economy vulnerable to further volatility.

According to EIU, the domestic economy’s primary concern has now shifted to weather-related disruptions.

For months, risks have been linked to the sustained military hostilities between the United States (US) and Iran, amid concerns that breaches of fragile peace agreements could drag the global economy deeper into uncertainty.

Oil supply disruptions triggered a global tightening of fuel supplies, prompting merchants to raise retail prices amid uncertainty. Recent peace talks—which later proved ineffective—were expected to ease pressure on fuel prices, but prices are likely to remain above levels seen in early 2025, EIU said.

“Although the risk of a fertilizer crisis has receded, the risk of a ‘super’ El Niño weather event hitting food prices is looming,” EIU warned, adding that the Philippines is the “most exposed” economy in the region to agricultural shocks stemming from “inclement weather patterns.”

This is particularly critical given that food and dining-out categories account for roughly 45 percent of the consumer price index (CPI).

The Philippines is also an import-dependent economy and the world’s largest rice importer. According to EIU, this leaves the country vulnerable and “partly at the mercy of global prices and/or protectionist measures.”

Consistent with its long-standing view, EIU said the BSP’s current policy strategy prioritizes price stability even at the expense of a moderating economy.

“Supply-side price pressures will continue to take policy precedence over weak demand,” EIU said. A hawkish stance, reflected in rising interest rates, generally helps tame inflation but may slow domestic demand.

Prior to the Middle East conflict, EIU said it had expected the local economy to expand by only around 4.5 percent in 2026. “We now expect it to expand by little more than three percent.”

Notably, EIU’s revised projection was released before the economic team disclosed its own downgraded outlook. Department of Economy, Planning, and Development (DEPDev) Secretary Arsenio M. Balisacan this week said gross domestic product (GDP) growth could now range from 3.5 percent to 4.5 percent.

Looking ahead, EIU expects borrowing costs to continue rising before stabilizing.

“We expect one more rate increase in the third quarter, taking the policy rate to five percent. High rates are expected to persist for several years to ensure inflation returns to the target range,” EIU said.

It added that the BSP “will not consider cuts again until 2027, at which point loosening will be relatively swift, given the likely weakness of growth.”

The economy grew by 4.4 percent in 2025, while GDP growth slowed to 2.8 percent in the first quarter of 2026, the weakest pace in five years.

“We expect the policy rate to be reduced to four percent by the end of [next] year,” EIU said, which, if realized, would represent near reversal of the expected cumulative hikes.

However, under a scenario in which food-exporting countries impose protectionist measures because of El Niño-related supply pressures, the BSP may not shift back to easing in 2027, as such conditions could warrant further monetary tightening, according to EIU.