Inflation is projected to settle within the government’s 2 to 4 percent target range over 2025 to 2026 mainly due to the decline in rice prices, the Bangko Sentral ng Pilipinas (BSP) said.

“The anticipated decline in rice prices from tariff reductions is expected to help guide inflation towards the midpoint of the target range in the first half of 2025,” the BSP said in its Monetary Policy Report (MPR) released Monday.

According to the MPR, the reduction in tariffs on rice imports is expected to have a moderating effect on inflation in the first half of 2025.

The BSP said the lower rice tariff is anticipated to lower landed costs of rice imports, with the benefits passed on to wholesale and retail prices.

The continued arrival of imports is projected to contribute to easing headline inflation during this period, it said.

The BSP, however, said inflation could exceed the target range in the latter part of 2025, primarily due to base effects from easing commodity price pressures in the corresponding period of 2024.

“Inflation is then projected to move closer to the midpoint of the target range in 2026, supported by an expected moderation in global commodity prices,” the report said.

The BSP said the baseline inflation forecast for 2025 and 2026 is at 3.5 percent.

Global crude oil prices

The BSP, however, said inflation may breach the target if the average price of global crude oil reaches USD100 per barrel in 2025 and USD85 per barrel next year.

“If Dubai crude oil prices were to average US$100.0 per barrel in 2025 and US$85.0 per barrel in 2026, inflation could breach the 2.0–4.0 percent target range, considering only direct effects and not potential second-round impacts,” it said.

BSP estimates showed that if crude oil prices average above USD100 per barrel, inflation is projected to reach 4.1 percent in 2025 and 4.8 percent in 2026.

Bloomberg and BSP estimates, however, showed the average Dubai crude oil price assumptions is at USD76.75 per barrel for 2025 and USD72.20 per barrel for 2026.

“Global crude oil prices are projected based on oil futures market data from January 21 to February 3, 2025, with domestic oil market prices expected to broadly track the trend in world oil prices. The crude oil path is influenced by stricter US sanctions on Russian oil producers, which have disrupted oil supply to China and India,” the report said.

“Additionally, cold weather has driven up winter fuel demand. Despite these upward pressures, the market is still expected to exhibit backwardation, reflecting prospects of subdued global demand and continued oversupply.”

Risks to inflation outlook

The BSP, meanwhile, said the risks to the inflation outlook for 2025 and 2026 have become broadly balanced.

Upside risks include potential increases in electricity rates, transport charges, and pork prices.

The main downside risk, on the other hand, stems from the spillover effects of lower tariffs on imported rice to domestic rice prices. (PNA)