Inflation in the Philippines remains the highest in the region, averaging 5.5% year-on-year in January to October 2026, with the latest reading accelerating to 7.8% YoY, driven largely by higher fuel prices and their pass-through into core inflation. The BSP’s 50bp jumbo hike in October was likely delivered in anticipation of this inflation surge. Looking ahead, easing oil prices, a weaker USD and uncertainty surrounding developments in Iran following the US midterm elections suggest that Bangko Sentral ng Pilipinas (BSP) may prefer to assess the cumulative impact of past tightening rather than move aggressively again. If oil prices continue to decline and 3Q GDP growth disappoints, the case for another jumbo hike appears limited. Nevertheless, we maintain our base case for a final 25bp rate hike in December, taking the policy rate to 5.75%. While the inflation outlook is improving, core inflation remains sticky, and the BSP is likely to retain a cautious tightening bias to keep inflation expectations anchored and stay ahead of potential upside risks.
Growth is likely to strengthen and recover to 5.0% in 2027, following a weaker-than-expected first half of 2026 that was weighed down by fiscal underperformance. As government spending normalises, favourable base effects kick in, and lower energy prices support household purchasing power, both business and consumer activity should improve. Labour market conditions have softened, with unemployment rising alongside weaker demand in government capex. Wage growth in construction and services has lagged inflation, constraining household incomes. The bright spot remains the manufacturing sector, where wages have held up better, rising nearly 8.5% YoY in the first half of the year. Labour demand in manufacturing also remains robust, with job postings up almost 30% YoY, suggesting continued strength in export-oriented and industrial sectors. Overall, the growth outlook is poised to improve, although risks remain tilted to the downside due to ongoing political uncertainty and potential spillovers from Middle East tensions.
FX fundamentals remain challenging, pointing to continued currency weakness: Narrow rate differentials and a widening current account deficit continue to weigh on the peso, while the BSP has drawn on its foreign exchange reserves to smooth currency volatility. As a result, reserve adequacy has deteriorated, with import cover declining to around 6.2 months, the lowest level since 2018. While the weaker peso has provided a boost to electronics exports and improved export competitiveness, this has not been sufficient to prevent a significant widening in the current account deficit. Strong import demand, particularly for capital and intermediate goods, has more than offset export gains. Services exports and remittance inflows remain resilient, but foreign direct investment inflows have weakened considerably, reducing a key source of stable external financing. Taken together, the balance of payments outlook remains soft, suggesting limited scope for sustained currency appreciation despite an improving growth backdrop.
