A “very strong El Niño” could force the Bangko Sentral ng Pilipinas (BSP) to raise interest rates late this year or in early 2027 if the weather pattern reignites inflationary pressures, Deutsche Bank said.
In its latest Asia Economic Notes, the bank said the BSP could again order a 25-basis-point rate hike this month but then pause from further tightening should headline inflation continue to decline and broader price pressures ease.
Inflation topped the central bank’s 2.0- to 4.0-percent target in March after the US attacked Iran. It hit a three-year high of 7.2 percent in April but has slowed in the last three months, easing to 6.2 percent in July.
Analysts have warned, however, that consumer prices could surge anew once El Niño hits in the fourth quarter, with prolonged dry spells possibly extending to next year.
“This poses an upside risk to the inflation outlook, which could compel the BSP to continue its tightening cycle in late-2026 or early-2027,” Deutsche Bank said.
The bank maintained its call for the BSP to raise its policy rate by another 25 basis points to 5.0 percent on Aug. 27, saying this was necessary to dampen broad-based price pressures and help stabilize real incomes.
BSP Governor Eli Remolona Jr. on Monday said that monetary authorities could still hike rates “as much as necessary to bring inflation down to target” but also said that “everything is on the table,” including a pause.
Deutsche Bank said the BSP could still deliver 50 basis points of additional rate hikes in the current tightening cycle, which would bring the policy rate to 5.25 percent.
“However, given the sustained decline in headline inflation and wider negative output gap, the timing of the final 25 bp hike could be pushed back,” it said.
“We leave our October forecast for a 25 bp hike unchanged for now, and will reassess with incoming data flow and BSP guidance ahead.”
Deutsche Bank noted that the price diffusion index was at 82 in July, only slightly lower than 83 in June. This means around 80 percent of the items in the consumer price index basket by weight are experiencing above-trend inflation, it explained.
“In other words, inflationary pressure in the Philippines is still broad-based, and spillover effects from the global energy shock are likely still working their way through the economy,” the bank said.
The BSP could decide to keep interest rates after August if headline inflation continues to ease and if the diffusion index drops toward 70, it added.
Deutsche Bank said the inflation outlook was particularly important for the BSP because the economy was also showing signs of weakness.
The Philippines grew by just 2.3 percent year on year in the second quarter, slowing from 2.8 percent in the first quarter and below Deutsche Bank’s 2.5-percent forecast.
The bank cut its 2026 growth forecast to 3.5 percent from 3.7 percent, placing it at the bottom of the government’s downwardly revised 3.5- to 4.5-percent target for the year.
Growth is expected to improve to 4.4 percent in the second half of 2026, “primarily supported by the expected acceleration in infrastructure spending, while government subsidies would help to ease the burden of higher prices on consumers,” Deutsche Bank said.
