Philippine Central Bank Warns of Cumulative Inflation Pressures Amid Currency Weakness and Rising Power Costs in 2026

The Bangko Sentral ng Pilipinas (BSP) is bracing for a resurgence of inflation this year, projecting the consumer price index (CPI) to average 3.2%—well within its 2%-4% target band but significantly higher than last year’s subdued environment. The central bank attributes this anticipated uptick to three converging forces: elevated electricity rates, base effects reverberating from 2025’s food price declines, and the cumulative inflation impact stemming from a weaker Philippine peso.

Economic Headwinds Constrain Growth While Inflation Looms

The outlook has darkened considerably for the Philippine economy. Governor Eli M. Remolona Jr. indicated that gross domestic product growth likely averaged just 4.6% in 2025, falling short of the government’s ambitious 5.5%-6.5% target. A corruption scandal that has throttled both public and private investment became the primary culprit, with the third quarter registering a dismal 4% expansion—the weakest showing in over four years.

This sluggish performance has compounded the challenges facing policymakers. The BSP noted that while consumption may be supported by rising real wages, “fragile business sentiment continues to dampen economic growth as investment activity remains weak.” The output gap has widened to increasingly negative territory, reflecting the divergence between actual and potential economic performance.

The central bank has consequently revised its 2026 growth projection downward, now expecting 5.4% expansion (within the revised 5%-6% government target) before accelerating to 6.3% in 2027. However, this recovery remains conditional on a turnaround in investment sentiment and stabilization of the political-economic environment.

Cumulative Price Pressures on the Horizon

Despite last year’s remarkable 1.7% inflation—the lowest in nine years since 2016’s 1.3%—several forces threaten to reignite price growth. The peso’s depreciation introduces a cumulative inflation dynamic that affects imported goods and energy costs simultaneously. Higher electricity tariffs are expected to feed directly into the CPI, while the reversal of 2025’s benign base effects (particularly the sharp rice price declines) will create year-on-year comparisons that appear more inflationary.

The BSP’s own accommodation measures pose an additional risk. Having slashed the benchmark policy rate by 200 basis points since August 2024 to its current 4.50%, the central bank warned that “the lagged impact of previous rate cuts may lead to demand-side price pressures.” Governor Remolona has signaled openness to one final 25-basis-point cut if economic conditions warrant support, though inflation risks may constrain further easing.

Analyst Consensus Points to Contained Inflation Despite Risks

External forecasters surveyed by the BSP in November struck a more optimistic tone. Their mean inflation forecast for 2026 averaged 2.9%—down from their earlier 3% estimate—with 89.6% probability that inflation would remain within the central bank’s target range next year, up sharply from 71.2% in October.

Upside risks to this benign scenario include adverse weather that could disrupt food supply, wage pressures, external tariff shocks, and the aforementioned electricity rate adjustments. Conversely, governance concerns related to public infrastructure projects could dampen both growth and inflation simultaneously. Most analysts anticipate the BSP will deliver a cumulative 25-75 basis points of additional rate cuts in 2026 before holding steady in 2027 as inflation stabilizes toward 3%.

The Monetary Board will convene on February 19 for its first rate decision of the year, with markets watching closely for signals about the trajectory of Philippine monetary policy in an environment shadowed by slowing growth and resurgent inflation risks.