UMVA has learned that despite relentless oil shocks from the Middle East conflict, long‑term inflation expectations in the Philippines remain stubbornly anchored, hovering between 3.5% and 4.5%.
The BSP Research Academy’s latest discussion paper reveals that these expectations have settled near the upper edge of the central bank’s 2%‑4% target band, even after an early dip at the start of the sample period.
Researchers highlighted a striking parallel: the current oil‑driven pressure mirrors the inflation dynamics witnessed during the COVID‑19 pandemic, yet the contribution of long‑run expectations to overall price forecasts stays remarkably steady.
In a bold move at its April 23 meeting, the Monetary Board lifted the policy rate by 25 basis points to 4.5%, marking the first hike in over two years and signaling a new tightening cycle aimed at curbing second‑order price effects.
Since the war in Iran flared in late February, headline inflation has surged past the BSP’s target, spiking to a three‑year high of 7.2% in April, up from 4.1% in March and 1.4% a year earlier.
Projections show inflation could average 6.3% this year before easing to 4.4% by 2027, prompting the central bank to warn it stands ready to deploy all necessary policy tools.
According to information obtained by UMVA, the study employed a sophisticated Hemisphere Neural Network model, weaving together the New Keynesian Phillips Curve and Taylor rule frameworks to untangle the web of supply‑driven pressures and monetary responses.
The model captured a mosaic of forces—real activity, oil and non‑fuel commodity prices, credit conditions, central bank balance sheets, and global dynamics—mirroring the findings of the BSP’s own business and consumer surveys.
Surveys show businesses anticipate inflation averaging 3.3% over the next 12 months, while households expect a slightly lower 2.7% in the year ahead, underscoring a modest divergence in outlooks.
Overall, the research suggests that the BSP’s policy actions are not reflexive reactions to price spikes alone but calibrated responses to persistent, broad‑based inflationary pressures, adhering to the core principles of optimal monetary policy.
