Philippine headline inflation moved above the Bangko Sentral ng Pilipinas (BSP) target in March, linked to higher transport, electricity and food costs, alongside a weaker Philippine Peso (PHP). UOB raised its 2026 inflation forecast and expects the BSP to keep its policy rate unchanged.
The BSP is expected to hold the policy rate at 4.25% at its 23 April meeting and remain on hold through 1Q27. At an off-cycle Monetary Board meeting on 26 March, the BSP said monetary policy has limited effect on supply-side inflation and will watch for second-round effects, using core inflation as a near-term guide.
UOB lifted its full-year 2026 inflation forecast to 5.5% from 3.0% previously. Other figures cited were a BSP estimate of 5.1% for 2026 and 1.7% for 2025.
The report linked the revised outlook to Middle East conflict-related disruptions, year-ago low base effects, and continued PHP weakness. It also noted government measures, including a declared national energy emergency, possible temporary suspension of fuel excise taxes, a review of airport-related charges, and diversifying oil supply sources.
Given the updated 2026 inflation forecast of 5.5%, we believe the market is mispricing the risk of the Bangko Sentral ng Pilipinas (BSP) holding rates steady. We have seen the 2-year swap rate climb to 4.65% in early April, suggesting some investors are still betting on a hike. This presents a clear opportunity to receive fixed on short-term interest rate swaps, positioning for rates to align with the BSP’s stated focus on growth.
The combination of persistently high inflation and a stationary policy rate is making the Philippine peso (PHP) less attractive, as real yields turn more negative. The peso has already slipped to 59.62 against the dollar this week, its weakest point since the fourth quarter of 2025. We therefore see value in positioning for further depreciation through USD/PHP non-deliverable forwards (NDFs) or by purchasing call options on the currency pair.
Uncertainty stemming from the Middle East conflict and the BSP’s policy inaction creates a volatile environment. Implied volatility on 3-month USD/PHP options has climbed to levels not seen since the public works scandal of late 2025, which saw volatility spike over 15%. This suggests that buying volatility through option straddles on USD/PHP could be a prudent strategy, profiting from a large price move in either direction.
We must also watch the government’s attempts to manage prices through non-monetary actions, like a potential suspension of fuel excise taxes. We saw a brief PHP rally in the last week of March 2026 after the national energy emergency was declared, showing how these headlines can cause sharp, temporary reversals. Any surprising success on this front could disrupt short-PHP positions and should be monitored as a key risk.
