The Bangko Sentral ng Pilipinas (BSP) may pause its easing cycle, even as cost pressures from rising global oil prices amid the war in Iran are expected to push inflation higher in the near term.
“Headline inflation may have increased in March to April due to rising fuel prices, but (average) inflation in '26 and '27 is still within the BSP's inflation target range,” Citi Philippines said in an e-mailed note on Wednesday. “We stand by our call for a pause in the BSP, but maintain the possibility of a shallow upside cycle should oil prices move higher than Citi's base-case.”
“If oil prices reach $100 per barrel and the US dollar appreciates, the BSP Governor has signaled the possibility of a rate hike, reversing his dovish policy stance in February… However, we maintain our base-case forecast for an extended BSP rate pause. The case for an immediate hike is not yet as attractive during a 2022 oil shock, leading to an overall rate increase.” [percentage points]”
Last week, BSP Governor Eli M. Remolona, Jr. said headline inflation could reach 4% if oil reaches $100 a barrel, adding that he may be forced to tighten his policy stance if fuel prices rise rapidly and persistently.
The monetary board last raised borrowing costs in October 2023. It started its current easing cycle in August 2024 and cut rates by a total of 225 basis points (bps), bringing the key policy rate to the lowest in three years at 4.25%.
Oil rose above $100 a barrel (/bbl) on Monday to its highest level since mid-2022 as supply concerns due to the ongoing war in the Middle East rose above $100 a barrel (/bbl).
Brent crude futures fell 0.4% between gains and losses to $87.45 a barrel in choppy trading on Wednesday, while U.S. crude was up 0.3% at $83.67 a barrel, Reuters reported.
The February 2026 monetary policy report showed the BSP expects inflation to average 3.6% this year and 2.8% in 2027, according to its latest forecasts, which are based on the assumption that Dubai crude oil prices will be $64.66 and $64.08 per barrel, respectively.
If oil prices average above $65/bbl this year, it would push inflation further away from the 3% target, while if Dubai crude prices average $80/bbl in 2026 and 2027, headline inflation would breach the upper end of the 2%-4% tolerance band, the central bank said in the report.
It added that these estimates only consider direct effects and exclude potential second-round effects.
Citi said oil prices of $80 to $90 a barrel could push inflation closer to 4% by April, slowing in May to an average of 3.6% by the end of the year.
“Near-term forecast changes include expected increases in fuel and LPG (liquefied petroleum gas) prices as well as electricity tariffs partly following higher coal prices,” the bank said. “We have not yet included second-round effects, for example from increases in public transport tariffs, nor broader core CPI (consumer price index) pressures from imported pass-through. However, these factors could be included as well, along with sharp inflation growth, if Brent approaches $120/bbl (in the second quarter) in Citi's oil bull-case scenario.”
It added that if oil prices remain above $100 for several weeks, the BSP may make one or two 25-bp hikes. “Such a scenario would risk undermining inflation expectations, necessitating a policy response.”
Meanwhile, Pantheon Macroeconomics said Philippine inflation could surge beyond the central bank's “sweet spot” of 3% this month as steep oil price hikes weigh on consumers.
In a note on Wednesday, Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco and Asia economist Mikita Gupta said headline inflation could rise to 3.3% from 2.4% in February.
“We estimate the monthly average cost of petrol and diesel will increase by at least 23% and 24% respectively month-on-month this month… in contrast to the average decline of -1.4% in the three months to February,” he said.
“If we are right, transport inflation will jump comfortably above 5% in the March report, a far cry from the outright, albeit mild, deflation in January-to-February. This will push the headline figure to 3.3% from 2.4%, which would be the first 3%-plus print in 19 months.”
Oil companies sequentially increased fuel pump prices this week amid the conflict in Iran. The Philippines is a net importer of oil and relies heavily on crude from the Middle East, which accounts for about 98% of its imports.
Meanwhile, Pantheon Macroeconomics expects inflation to average 3.2% this year, slightly higher than its earlier forecast of 3.1%.
“The strong outlook for global oil prices in 2026 may also mean that housing and utility inflation, which reacts with a slightly longer delay to global energy prices, should remain stable over the longer term. In terms of monetary policy, inflation remains within the BSP's 2 to 4% target range in our revised projections. As a result, we reiterate our view that the target reverse repo (repurchase) rate remains unchanged for the foreseeable future. Will remain at 4.25%.”
development effect
Citi said the Middle East war could impact remittances and domestic consumption, Which may impact the first quarter economic development,
“The ongoing oil shock presents a hurdle to the recovery: PH has announced a four-day workweek, which could reduce mobility and hit retail sales,” it said.
“Inbound remittances could also be impacted if PH workers from the Middle East are repatriated as a result of the conflict. The resilience of domestic purchasing power will also be tested given rising fuel prices,” Citi said.
The economy is in recession from the second half of 2025 as investment, public consumption and government spending slow amid weak sentiment due to the flood control corruption scandal.
GDP growth in 2025 slumped to 4.4%, the lowest level since the pandemic, as the economy grew only 3.9% in the third quarter and 3% in the fourth quarter – all well short of the government's 5.5%-6.5% target.
The BSP had earlier said the economy could start to recover by the second half of the year, growing by an average of 4.6% by the end of the year, as they saw signs of a temporary improvement in investor confidence. — Katherine K. chan