BSP: Sustained $100 oil to drive up 2027 inflation

MANILA, Philippines — Inflation could reach 6.6 percent next year if Dubai crude oil prices stay at $100 per barrel, with further increases in energy costs threatening to prolong price pressures even as economic growth weakens, according to the Bangko Sentral ng Pilipinas (BSP).

Inflation could also climb to seven percent in 2027 under a higher oil-price assumption of $110 per barrel, the BSP estimated in its August Monetary Policy Report.

The scenarios assume oil prices remain at those levels starting September and capture only their direct effects, excluding subsequent wage and price adjustments that could spread the pressure across the economy.

Separately, the BSP placed the probability of average inflation exceeding the upper end of its two to four percent target band in 2027 at 81.6 percent. The likelihood of inflation settling within the band was only 16.8 percent.

The central bank’s baseline forecasts put inflation at 6.1 percent this year, 5.4 percent in 2027 and 3.3 percent in 2028. These projections assume average Dubai crude prices of $81, $75 and $72 per barrel, respectively.

Inflation is expected to peak in the fourth quarter and remain above the target band through the third quarter of 2027, reflecting persistent supply pressures, including higher electricity charges.

Beyond its oil-price calculations, the BSP examined a broader high-inflation scenario involving petroleum supply shortages, higher transport fares, further escalation of the Middle East conflict and agricultural disruptions from El Niño.

Under this adverse scenario, a severe El Niño episode is assumed to raise domestic rice prices by about 40 percent and corn prices by 25 percent over a 12-month period starting in the fourth quarter.

Even its baseline outlook incorporates a decline in domestic rice production more severe than those recorded during the 2018 to 2019 and 2023 to 2024 El Niño episodes.

Higher farming costs can compound the pressure. The baseline assumes fertilizer prices for rice and corn rise by 60 percent starting September, alongside increases of 30 percent in land freight costs and 25 percent in sea freight costs.

“The high-inflation scenario pushes headline inflation further above the three-percent target over the forecast horizon. This suggests the need for a tighter monetary policy stance to help contain sustained cost-push shocks from further broadening,” the BSP said.

However, a separate low-inflation scenario offers scope for an eventual shift toward lower interest rates if wage increases are more limited geographically and weak confidence further restrains investment and household spending.

That scenario assumes minimum wages rise by 12.2 percent in Metro Manila and 5.5 percent elsewhere this year, compared with the baseline assumption of a nationwide 12.2-percent increase.

“Some policy tightening in 2026 is still necessary to contain high inflation, although a policy reversal in 2027 could become possible in response to weakening economic prospects,” the BSP said.

The Monetary Board raised its benchmark interest rate, which helps guide borrowing costs, by 25 basis points to five percent on Aug. 27.

The report’s central projections also incorporate a possible October increase based on market survey results, rather than a commitment to another hike.

These policy considerations come as the BSP sees growth remaining subdued for the rest of 2026 before recovering next year.

“Prospects for domestic growth weakened further,” it said, citing weaker-than-expected second-quarter output, a contraction in public construction and subdued household spending.

Weaker income growth and elevated inflation are expected to constrain consumption, while unfavorable business and consumer sentiment could hold back investment.

The economy is consequently projected to operate further below its potential this year. Planned infrastructure catch-up spending can provide some relief in the second half, with recovering investment, trade and household consumption expected to support improvement in 2027.