BSP flags downside inflation risks in 2026

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January 12, 2026 | 12:00am

MANILA, Philippines — The Bangko Sentral ng Pilipinas sees inflation risks in 2026 tilted to the downside, with new analysis showing a high chance that price growth could slip below the lower end of the government’s target range as global commodity prices stay benign and domestic pressures remain muted.

In its December 2025 Monetary Policy Report, the BSP rolled out an Inflation At Risk framework designed to look beyond single point forecasts and better capture extreme inflation outcomes.

The central bank said relying only on baseline projections is “insufficient to fully understand inflation dynamics,” especially since economic relationships can change sharply when inflation is either very low or very high.

Based on the model, inflation by October 2026 could fall to as low as 0.3 percent at the lower end of the distribution. The median forecast stands at 2.2 percent, while the upper bound estimate is 3.2 percent.

Overall, the BSP estimates a 44.8 percent probability that inflation will fall below two percent. By contrast, the likelihood of inflation breaching the upper end of the target above four percent is “essentially zero.”

It added that upside pressures are being capped by “benign inflation outturns and expectations, as well as moderate global oil and food inflation.”

The Inflation At Risk model is built on an open economy Phillips curve and uses quantile regression to examine how different factors affect inflation across a range of possible outcomes. In simple terms, the approach allows policymakers to see what drives inflation during calm periods versus more volatile ones and to assess risks at the extremes, not just the most likely outcome.

The results show that inflation drivers behave differently depending on the inflation environment. During low inflation periods, expectations play a bigger role than current inflation. But when inflation is high, current price pressures become more important, suggesting that price setting becomes less forward looking in stressed conditions.

External factors also matter more when inflation risks are on the upside. The BSP found that the impact of peso depreciation becomes much stronger at higher inflation levels, with the exchange rate posting a coefficient of 0.60 at the 90th percentile. Global oil and food prices also emerge as major drivers of upside risks, turning significant only during high inflation episodes.

This is especially important for the Philippines, where food makes up nearly 38 percent of the consumer price index basket. Meanwhile, domestic indicators such as the output gap and credit gap were found to have little influence on 12-month ahead inflation risks compared with external shocks.

On the downside, the BSP said inflation expectations are the key driver, particularly in an environment of sustained low inflation. Looking ahead, the central bank said the risk profile for 2026 points to continued downside pressures, driven by subdued global commodity prices and recent low inflation readings.

Overall, the BSP said the findings strengthen the case for a more risk-based approach to monetary policy.

“Evidence of nonlinear effects from inflation risk factors supports the adoption of a risk management approach that complements central forecast analysis with tail risk assessment,” it said, stressing the need for “sustained risk based surveillance and a flexible, data driven approach to monetary policy to effectively safeguard price stability.”