By Katherine K. Chan, Reporter
REIGNITED SHOCKS amid the fresh escalation of the Middle East war and the looming “Super El Niño” have heightened the risk of de-anchoring inflation expectations, which economists said could keep the central bank on a tightening path.
GlobalSource Partners Country Analyst Diwa C. Guinigundo, a former central bank deputy governor, said there is now a higher risk that inflation expectations could de-anchor amid growing price pressures.
“I would be cautious about declaring inflation expectations de-anchored at this point. However, the risk has clearly increased,” Mr. Guinigundo told BusinessWorld in a Viber message.
“The combination of renewed price shocks and a potentially severe El Niño raises the prospect of persistent food inflation, which could spill over into broader prices, wages, and inflation expectations,” he added.
Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. on Friday said they are now more than before worried about inflation expectations, noting that “expectations matter” in uncertain situations.
However, he added that he feels reassured that inflation expectations are moving toward the BSP’s 3% target, with their latest survey showing that inflation is seen at 3.3% in the three years ahead.
“What we worry about is expectations that look like the red line. They don’t seem anchored enough,” Mr. Remolona said during the Financial Executives Institute of the Philippines (FINEX) 58th Annual Conference. “And it makes our life much more difficult when the expectations are not aligned.”
The “red line” refers to “de-anchored expectations,” projecting inflation to hover between 5%-6% over the next three years, based on the results of the BSP’s Survey of External Forecasters as of August.
For Mr. Guinigundo, the BSP must evaluate whether consumers and businesses are pricing in higher inflation expectations in their spending, pricing, and wage-setting decisions.
“The BSP must therefore remain vigilant, particularly in monitoring inflation expectations, core inflation, and second-round effects. Preventing temporary supply shocks from becoming persistent inflation is now especially important,” he added.
Meanwhile, Union Bank of the Philippines Chief Economist Ruben Carlo O. Asuncion said inflation expectations remain anchored, but the fresh acceleration of consumer prices reflects rising risks.
“While we believe inflation expectations remain generally anchored, the latest 7.2% inflation print and the pickup in core inflation suggest that upside risks are increasing,” he also told BusinessWorld via Viber.
“The concern is less about a one-off increase in food prices and more about the possibility that higher food costs become embedded in wage demands, transport fares, and business pricing decisions.”
Inflation sizzled to a three-and-a-half year high of 7.2% in September after the prices of fuel, food, housing and utilities surged.
This was sharply faster than the 6.1% in August and 1.7% in September 2025, matching this year’s peak first recorded in April.
September also marked the seventh consecutive month that inflation exceeded the central bank’s target, bringing the year-to-date average to 5.4%.
On the other hand, Ser Percival K. Peña-Reyes, a senior research fellow at the Ateneo Center for Economic Research and Development, noted that fresh inflation shocks, especially for food, can drive near-term expectations higher.
“The picture appears to be under increasing pressure, but not necessarily fully de-anchored. Renewed inflation shocks can raise near-term price expectations, particularly if food prices rise because of El Niño and supply disruptions,” he told this paper via Facebook Messenger.
“The BSP governor’s expressed concern suggests that the risk of second-round effects where higher food and fuel prices feed into wages, pricing decisions, and broader inflation is becoming more prominent,” he added.
Mr. Remolona had also flagged the severe El Niño as a top concern, describing it as “really, really bad news.”
“These days, the scenario that we care about the most is El Niño. There’s a regular El Niño, a kind of benign El Niño which is bad news. But there’s a bad El Niño which is really, really bad news,” Mr. Remolona said.
“So, we have to worry about both scenarios and decide on a monetary policy based on that,” he added.
Last month, the Philippine Atmospheric, Geophysical and Astronomical Services Administration said the country may encounter a “very strong” El Niño season until December, which could persist until the first half of next year.
PROLONGED TIGHTENING
For Mr. Asuncion and Mr. Peña-Reyes, the case for another quarter-point rate hike has strengthened, with inflation risks leaning toward a higher-for-longer interest rate environment.
“While growth momentum has softened, recent communication from the BSP suggests that inflation risks, particularly those linked to El Niño and inflation expectations, have moved higher on the list of policy priorities,” Mr. Asuncion said.
“As a result, rates may need to remain elevated for longer than previously expected, especially if food supply disruptions intensify and inflation remains above target through yearend.”
Mr. Guinigundo noted that the BSP faces a difficult balancing act ahead of its Oct. 22 meeting as the economy continues to grapple with heated inflation and sluggish growth.
“A higher-for-longer rate path is therefore a real possibility, but it should not be automatic. Monetary policy cannot produce more rice, restore rainfall, or resolve supply-chain bottlenecks,” he also said.
“The BSP must prevent inflation expectations from becoming entrenched, while the government complements monetary policy with timely and effective measures to protect food supply and ease supply-side constraints,” he added.
Meanwhile, Mr. Peña-Reyes expects the BSP to consider El Niño’s impact on food inflation, inflation expectations, domestic growth, and lags in policy adjustments at its upcoming review this month.
In August, the Monetary Board tightened for a third straight meeting to preemptively rein in inflation risks, raising its key policy rate by 25 basis points (bps) to an over one-year high of 5%. This brought its cumulative hikes to 75 bps since it began tightening in April.
In a separate report on Friday, Japan-based Nomura Global Markets Research tagged the Philippines with the “highest” inflation pressure in Asia, with the country having the highest inflation generalization index of 108.
“The sharp rise in the generalization index readings is consistent with our view that pass-through effects will be quick and significant,” Nomura Research Analyst Euben Paracuelles said.
The country’s high inflation pressure, especially with emerging risks from El Niño, supports the case for further tightening by the BSP, he added.
“The balance of risks is tilted to the upside, due to the possibility of a strong El Niño in the coming months,” Mr. Paracuelles said. “We reiterate our forecast for BSP to hike by another 25 bps this month to 5.25%, but we continue to flag risks that BSP could deliver more thereafter.”
Meanwhile, Capital Economics Asia Economist Gareth Leather said last month’s inflation print and persistent peso weakness warrant a fourth straight BSP rate hike.
On Oct. 8, the peso lost 15 centavos to close at its intraday low of P62.90 against the greenback, breaking the previous all-time low finish of P62.86 logged on Sept. 14, Bankers Association of the Philippines data showed.
As of Oct. 9, the peso has slumped by P4.011 or 6.39% from its P58.79 finish on Dec. 29, 2025.
Mr. Leather noted that Philippine gross domestic product growth staying muted could prompt the BSP to stand pat later.
“But, if energy prices remain elevated into next year and El Niño adds further upward pressure to food inflation, the risks are increasingly skewed towards the BSP extending its tightening cycle.”