Philippines inflation outlook faces El Niño risk in fourth quarter

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Philippines inflation El Niño risk

Highlights

Chinabank Research estimates a Super El Niño could add 0.25 to 1.57 percentage points to annual inflation and reduce GDP growth by 0.2 to 0.81 percentage point.
Philippine headline inflation returned to 7.2% in September, averaged 5.4% for the first nine months, and has stayed above Bangko Sentral ng Pilipinas' 3% target for seven months.
Nomura Global Markets Research expects the BSP to raise rates by 25 basis points this month and signals possible further tightening due to El Niño-driven inflation risks.

Inflation and growth risks from a stronger El Niño

As reported by BusinessWorld, citing Chinabank Research, a report dated Oct. 13 says a "Super El Niño" could intensify supply disruptions, lift consumer prices and create a second-round inflation shock beyond agriculture. The research firm estimates El Niño could add 0.25 to 1.57 percentage points to annual headline inflation and reduce GDP growth by 0.2 to 0.81 percentage point, depending on how severe conditions become.

A weak El Niño could add about 0.25 percentage point to headline inflation through direct price effects alone, while a strong or very strong episode could trigger broader pass-through effects in food manufacturing and consumer prices. Chinabank Research says the largest direct effects are likely to come from palay, corn and other crops, while higher electricity demand and possible constraints on water and hydropower supply could add further price pressure.

The Philippine Atmospheric, Geophysical and Astronomical Services Administration said last month that a strong El Niño is already active in the Tropical Pacific and could intensify into a very strong event until December, potentially lasting through the first half of 2027. Chinabank Research says inflation is expected to peak in the fourth quarter of 2026 and remain below 8% in its baseline scenario, though a severe El Niño could push it past that level.

Monetary policy and wider economic implications

Bangko Sentral ng Pilipinas Governor Eli M. Remolona, Jr. says policymakers must prepare for the worst even as the full scale of the weather threat remains unclear. Speaking at the International Monetary Fund and World Bank Annual Meetings in Thailand, he says the effects of El Niño may become clearer early next year, particularly in January and February.

The central bank said in August that inflation could peak in the fourth quarter as El Niño feeds into food and commodity prices. In September, inflation returned to 7.2%, matching this year's peak, while headline inflation averaged 5.4% in the first nine months and stayed above the BSP's 3% target for a seventh straight month.

Chinabank Research says timely imports and sufficient inventories helped cushion the economy during the 2015 to 2016 El Niño episode, suggesting the current inflation impact will also depend on imported rice availability and the government's buffer stocks. It says a severe El Niño could trim GDP growth by 0.2 percentage point this year and by 0.61 percentage point in 2027, while a weak episode could cut full-year growth by 0.05 percentage point in 2026 and 0.15 percentage point in 2027.

Nomura Global Markets Research says inflation risks from a strong El Niño could lead the BSP to extend its tightening cycle. In a separate Oct. 13 report, analysts Euben Paracuelles and Nabila Amani reiterate their forecast for a further 25-basis-point increase this month and say upside inflation risks, especially from El Niño, could justify additional rate hikes after that.

Our earlier report on BSP term deposit yields highlighted how Philippine money markets were already pricing in another 25-basis-point policy rate hike ahead of the central bank’s Oct. 22 review. It noted that firm demand at the seven-day term deposit auction and a slight rise in the accepted yield reflected persistent inflation concerns, alongside the BSP’s ongoing liquidity-absorption operations to reinforce policy transmission.

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