Nomura: Philippines' April inflation surges to 7.2%, potential 75bp rate hike within the year

Overview

This report by Nomura Securities analyzes the macroeconomic data for the Philippines in April 2026. It notes that due to energy price shocks triggered by the Iran war and the lack of fiscal subsidies, the Philippines' overall CPI year-on-year surged to 7.2% in April, far exceeding market expectations and central bank guidance, surpassing levels seen during the 2022 Russia-Ukraine conflict. More critically, core inflation also rose significantly to 3.9%, indicating rapid transmission of energy costs to a broader consumption basket. Based on this, Nomura significantly revised its 2026 inflation forecast and adjusted its expectations for the Philippine central bank's (BSP) monetary policy path, predicting an additional 75bp rate hike within the year to curb inflation expectations. However, considering economic growth pressures, the pace of rate hikes will be cautious and short-lived, maintaining the baseline expectation of rate cuts in the second half of 2027.

Core views

The mismatch between demand and supply is the main cause of the current inflation surge. In the April CPI year-on-year reading of 7.2%, transportation inflation surged from 9.9% to 21.4%, and utilities (including water, electricity, and gas) inflation doubled from 4.2% to 8.2%, directly reflecting the impact of the Iran war on fuel and electricity prices. Meanwhile, rice price inflation jumped from 3.5% to 13.7%, becoming a key unexpected factor driving food inflation to 6.0%. Due to fiscal constraints limiting the government's ability to implement comprehensive fuel subsidies, relying only on limited administrative measures to manage oil price fluctuations, these supply-side cost pressures will persist. The acceleration of core inflation confirms the risk of 'second-round effects' materializing. Despite a negative output gap, core inflation rose to 3.9% (previous 3.2%), close to Nomura's forecast of 3.7%. The report specifically highlights that prices for highly input-cost-sensitive sectors such as entertainment, personal care, and dining and accommodation services all showed significant increases in April. This indicates that energy price increases are no longer confined to goods but are spreading to services, a trend that concerns the central bank as it suggests inflation may become more entrenched. Monetary policy is forced to turn hawkish but remains constrained by limits. Given the latest CPI data far exceeding BSP's 2-4% target range and rising core inflation exacerbating concerns about inflation expectations, Nomura revised its 2026 overall inflation forecast from 4.9% to 6.1% and core inflation from 3.8% to 4.6%. Accordingly, BSP is expected to raise rates by 25bp each in June, August, and October, bringing the year-end policy rate to 5.25% (previously forecasted at 4.75%). However, the report emphasizes that BSP will not adopt aggressive strategies due to economic growth deficits and external risks, with rate hikes proceeding in small 25bp increments. From a medium- to long-term perspective, the tightening cycle will be brief, with rate-cutting windows remaining. Nomura maintains its forecast of CPI inflation declining to 3.2% in 2027, believing that BSP will not need excessive tightening as inflation returns to the target range. Therefore, it expects BSP to initiate a total 75bp rate cut in the second half of 2027, bringing the year-end policy rate back to 4.50%. This assumption is based on inflation returning to the target range and core inflation stabilizing.

Analysis framework

This report adopts a typical 'external shock-price transmission-policy response' macro analysis framework. First, by dissecting CPI sub-indices (transportation, utilities, food), it precisely identifies the structural sources of inflation exceeding expectations, namely geopolitical-driven imported energy inflation combined with domestic food price volatility. Second, the institution focuses on 'core inflation' as an indicator to validate the breadth of price transmission, observing high-sensitivity sub-indices such as services to determine whether one-time energy shocks have transformed into endogenous inflation pressures—a key signal for central bank policy shifts. Finally, in deriving monetary policy, it considers not only the deviation of inflation from the target but also incorporates 'output gap' and 'fiscal space' as constraints, leading to a nonlinear policy path prediction of 'short-term intensified rate hikes and medium-term rapid rate cuts' rather than simple linear extrapolation.

Methodology notes

• Industry/Sector Analysis FrameworkVolume-Price Breakdown

  CPI Sub-Indices Attribution Analysis

  By decomposing overall inflation into specific sub-indices such as transportation, utilities, and food, it identifies core variables driving inflation (e.g., energy and rice), distinguishing temporary shocks from structural price increases to assess inflation persistence.

• Cycle and Sentiment Framework

  Second-Round Effects and Price Transmission Monitoring

  Focuses on whether upstream cost increases (e.g., energy) spread downstream to services and core goods. When core inflation rises despite a negative output gap, it typically signals cost transmission mechanisms taking effect, potentially triggering wage-price spirals—a key leading indicator for central bank tightening.

• Macroeconomic framework

  Output Gap Constraints on Monetary Policy

  Even with high inflation, if the economy still has a negative output gap (actual output below potential output), the central bank will be more cautious in raising rates to avoid excessive tightening stifling recovery. This explains why the report predicts limited rate hikes and a short cycle.

Key data

• April Overall CPI Year-on-Year7.2%Significantly higher than March's 4.1%, far exceeding market consensus of 5.5% and BSP's upper forecast of 6.4%
• April Overall CPI Quarter-on-Quarter (Seasonally Adjusted)3.0%Accelerated from March's 1.6%, marking the highest monthly quarter-on-quarter growth since February 2023
• April Transportation Inflation Year-on-Year21.4%More than doubled from March's 9.9%, mainly due to fuel price increases driven by the Iran war
• April Rice Inflation Year-on-Year13.7%Sharply rose from March's 3.5%, a key unexpected source of inflation exceeding expectations
• April Core Inflation Year-on-Year3.9%Significantly higher than March's 3.2%, indicating widespread transmission of energy costs to services
• 2026 Overall CPI Forecast (New)6.1%Revised upward from 4.9%, based on oil price assumptions increasing from $86/barrel to $98/barrel
• 2026 Core CPI Forecast (New)4.6%Revised upward from 3.8%, reflecting broader price transmission
• 2026 Expected Rate Hike (New)+75bpRevised upward from +25bp, with 25bp hikes expected in June, August, and October, bringing the year-end rate to 5.25%
• 2027 Second Half Expected Rate Cut-75bpExpected to commence after inflation returns to the target range, bringing the year-end rate back to 4.50%

Impact & implications

For the Philippines' macroeconomy, this means combating inflation will become the overriding task in the short term, even at the expense of some growth. For financial markets, the short end of the bond yield curve will face upward pressure until the rate hike path is fully priced in; for the exchange rate, widening interest rate differentials may support the peso, but external risk premiums should be monitored. For the corporate sector, especially transportation, dining, and retail industries, cost-pass-through capabilities will be key to profitability differentiation, with firms unable to pass on costs facing double squeezes on margins. For households, real purchasing power will significantly deteriorate in 2026, with relief only expected in the second half of 2027 when policies turn accommodative. The report's implied policy logic is to use short-term certainty of tightening to secure medium- to long-term price stability, avoiding a prolonged high inflation trap similar to 2022.

Risks

• The Iran war lasts longer than expected, causing further surges in energy prices
• Deterioration of the Philippine government's fiscal position forces large-scale fuel subsidies, weakening the effectiveness of rate hikes
• Global economic recession leads to a sharp drop in external demand, further expanding the Philippines' negative output gap
• Core inflation transmission accelerates faster than expected, forcing BSP to adopt more aggressive rate hikes beyond 75bp
• New shocks to food supply (e.g., rice) cause food inflation to remain persistently high

What to watch

• June BSP monetary policy meeting resolution and post-meeting statement tone
• Monthly trends in core inflation sub-indices (especially services) in coming months
• International crude oil price movements and frequency of domestic retail oil price adjustments in the Philippines
• Government execution of national energy emergency administrative orders and oil price control effectiveness
• 2026 Q2 GDP growth and output gap estimate updates