HIGHER electricity costs, base effects, and a weakening peso could push Philippine inflation back within the Bangko Sentral ng Pilipinas’ (BSP) 2%-4% target band this year.
“Inflation is projected to settle within the target range in 2026 and 2027 after a subdued inflation environment in 2025,” the BSP said in its Monetary Policy Report for December 2025.
The central bank expects the consumer price index (CPI) to average 3.2% this year and 3% in 2027.
In 2025, inflation averaged 1.7%, the slowest print seen in nine years or since the 1.3% in 2016.
“Higher electricity rates and possible positive base effects could drive inflationary pressures. These base effects follow the decline in food prices, particularly rice prices, in 2025,” the central bank said.
“Inflation is then expected to approach 4% by mid-2026 before easing toward 3% by Q2 2027, as global commodity prices stabilize.”
It added that the lagged impact of its previous rate cuts that may lead to demand-side price pressures, as well as the peso’s depreciation, could also stoke inflation.
The Monetary Board has cut benchmark interest rates by a total of 200 basis points (bps) since its easing cycle began in August 2024, bringing the policy rate to 4.50%.
BSP Governor Eli M. Remolona, Jr. has left the door open to one final cut this year to support the economy if needed. Philippine growth prospects have worsened as a wide-scale corruption scandal has affected both public and private investment.
The Monetary Board will hold its first rate-setting meeting for the year on Feb. 19.
Results of the BSP’s survey of 23 external forecasters (BSEF) for November showed that these governance concerns could continue to affect the economy, which may help temper price pressures.
The analysts see inflation averaging 2.9% for 2026, down from their earlier estimate of 3%. For 2027, their mean inflation forecast was likewise lower at 3% from 3.2%.
“Analysts cited the following upside risks to inflation: adverse weather conditions that could exacerbate food supply issues, upward adjustments in electricity rates, wage hikes, external developments and tariffs, and base effects,” the BSP said.
“The downside risk is seen to emanate from governance issues related to flood control projects, which could dampen the growth and inflation outlook.”
The November 2025 BSEF showed that the respondents assigned an 88.6% probability that inflation would remain within target this year, up from 75.4% in the October survey. The probability of inflation settling within the goal next year also increased to 89.6% from 71.2%.
“Most analysts expect the BSP to further reduce the policy interest rate by another 25–75 bps in 2026 and hold policy settings in 2027,” it added.
DISMAL GROWTH PROSPECTS
Meanwhile, the central bank said fragile business sentiment could continue to dampen economic growth as investment activity may remain weak.
Mr. Remolona earlier said gross domestic product (GDP) growth likely averaged 4.6% in 2025, well below the government’s 5.5%-6.5% full-year goal.
Economic managers have already said the 2025 target could be difficult to reach after the nine-month average was pulled down to 5% by the over four-year low 4% outturn in the third quarter as the graft scandal stalled public spending.
“The growth outlook for 2026 has likewise been lowered, as the investment slowdown is expected to persist through the first half of the year amid less favorable economic sentiment,” the central bank added.
“Growth is projected to be slightly higher in 2027, supported by the lagged impact of the BSP’s policy rate cuts since August 2024. Nonetheless, persistent uncertainty surrounding global economic policies, particularly in trade and investment, continues to pose downside risk to domestic growth.”
The BSP chief earlier said GDP growth could pick up to 5.4% this year, within the government’s revised 5%-6% target, and then to 6.3% in 2027 versus the 5.5%-6.5% goal.
“The output gap has become more negative relative to the previous round, as governance issues have dampened investment prospects… Investment activity is expected to moderate further in 2026, resulting in a negative output gap throughout the year. The output gap is projected to gradually narrow and approach a neutral level by end-2027,” the central bank said.
“At the same time, potential output growth is expected to moderate in the near term, as weak economic sentiment continues to constrain private investment. This is compounded by subdued public infrastructure spending following the proposed removal of flood control projects from the 2026 budget of the Department of Public Works and Highways.”
Still, consumption could be supported by rising real wages and household incomes, the BSP said. “[A] gradual recovery in investment activity and infrastructure spending is expected to underpin overall demand beginning in 2027.” — Katherine K. Chan