By Katherine K. Chan, Reporter
PHILIPPINE INFLATION could accelerate past 8% in the fourth quarter if a severe El Niño materializes, worsening supply disruptions and fueling broader price increases, Chinabank Research said.
In a report dated Oct. 13, the research firm said the “Super El Niño” could stoke inflation and further dampen the already fragile gross domestic product (GDP) growth.
“The Philippine economy, already facing weak growth and the fallout of the US-Iran energy shock, is confronting another potentially significant supply-side shock from an intensifying El Niño,” it said. “El Niño is not just an agriculture story — it is a potential second-round inflation shock and an additional drag on growth.”
A weak El Niño could add about 0.25 percentage point (ppt) to headline inflation solely through direct price effects, it said.
On the other hand, a strong and severe or very strong El Niño episode could prompt second-round effects, which could drive inflation faster by an estimated 0.66 ppt and 1.57 ppts, respectively.
“We estimate that El Niño could raise annual headline inflation by 0.25-1.57 ppts and reduce GDP growth by 0.2-0.81 ppt, depending on severity,” Chinabank Research said. “However, the inflationary impact is not necessarily proportional to the decline in agricultural output, as timely imports and adequate rice inventories could cushion supply disruptions.”
“With inflation already elevated, a more severe El Niño remains a key upside risk to our inflation outlook,” it added.
The Philippine Atmospheric, Geophysical and Astronomical Services Administration last month said a strong El Niño is already active in the Tropical Pacific.
It noted that this could intensify into a “very strong” one until December and potentially endure through the first half of 2027.
El Niño is expected to cause severe dry conditions to parts of the country, which could strain the agriculture sector and the overall economy as it threatens water supply and energy production.
If realized, the Philippines may suffer another round of supply shocks, particularly in food items, and drive its already elevated inflation above 8%, Chinabank noted.
“The largest direct effects are expected from palay, corn, and other crops, and second-round effects could emerge through food manufacturing and consumer prices. Higher electricity demand and constraints on water and hydropower supply could add further pressure, although the magnitude of these effects remains uncertain,” it said.
“We expect inflation to peak in Q4 2026 and remain below 8% in our baseline, although a severe El Niño could push it above that level,” it added.
PREPARE FOR THE WORST
Speaking at a panel during the International Monetary Fund and World Bank’s Annual Meetings in Thailand, Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said while the full picture of the looming El Niño remains uncertain, they must prepare for the worst.
“Looking forward, we worry about El Niño. And we don’t know how bad it will be,” he told the panel on Wednesday. “So, we have the regular, ordinary El Niño, which is bad. And then we have the Godzilla El Niño, which is really, really bad. So those are two different scenarios.”
Asked if existing El Niño conditions have been worse than they anticipated, Mr. Remolona said: “We don’t know yet.”
“There have been kinds of local weather shocks that have been bad. But the effect of El Niño won’t happen till early next year, January, February. So, we’re, we’re holding our breath. But we have to be prepared for the worst,” he added.
The central bank in August said inflation could peak in the fourth quarter as the impact of El Niño feeds into the prices of food and other commodities.
In September, inflation returned to this year’s peak of 7.2% after renewed pressures from bad weather, and the reignited Middle East war increased food, fuel, and utility costs.
It marked the seventh consecutive month that inflation was above the BSP’s 3% target, with the headline print averaging 5.4% in the first nine months of the year.
Chinabank Research noted that timely imports and sufficient inventories cushioned the economy from a supply shock during the El Niño event between 2015 and 2016.
“This suggests that the inflationary impact of the current El Niño will depend not only on the extent of domestic production losses but also on the availability and cost of imported rice and the government’s ability to maintain adequate buffer stocks,” it said.
IMPACT ON GROWTH
Meanwhile, Chinabank Research said a severe El Niño could trim GDP growth by 0.2 ppt this year and by 0.61 ppt in 2027.
A weak El Niño may be less harsh on the economy, with Chinabank Research projecting it to cut full-year growth by 0.05 ppt in 2026 and 0.15 ppt in 2027. GDP growth could decline by about 0.41 ppt over the next two years amid a strong El Niño episode, it added.
Economic managers are targeting 3.5%-4.5% GDP growth this year and 5%-6% next year until 2030.
Chinabank Research said the supply-driven shocks from El Niño leave the BSP’s hands tied, with its previous hikes only shielding the economy against spillovers.
“While markets may continue to price in BSP rate hikes, monetary tightening has limited ability to address supply-driven inflation. The BSP’s earlier preemptive hikes should provide some buffer against second-round price pressures,” it said.
Meanwhile, Japan-based Nomura Global Markets Research said inflation risks from a strong El Niño could prompt the central bank to extend its tightening cycle further.
“We reiterate our forecast for BSP to hike by another 25 bps (basis points) this month, but we continue to flag risks it could deliver more thereafter, as the balance of risks to inflation remain tilted to the upside, particularly from a strong El Niño,” Nomura research analysts Euben Paracuelles and Nabila Amani said in a separate Oct. 13 report.
“We believe BSP will see the significant pickup in core inflation as a sign of more second-round effects that require additional tightening, similar to its rationale for the 75 bps of hikes thus far,” they added.
The BSP has been on a tightening path since April, delivering a total of 75 bps in hikes to raise its key policy rate to an over one-year high of 5%.
Mr. Remolona has left the door open for additional rate increases as needed to steer inflation back to their target.