'Godzilla El Niño' is wreaking havoc with Philippine central bank's inflation forecasts

Key points

• The Philippine central bank is planning for a 'Godzilla' El Niño alongside a prolonged oil shock.
• Philippine inflation rose to 7.2% in September from 6.1% in August, with rice prices up 18%.
• HSBC expects the central bank to raise its benchmark rate to 5.25% next week and again in December.

The Philippine central bank is preparing for a 'Godzilla' El Niño on top of a prolonged oil shock as the Southeast Asian nation tries to rein in inflation from three-year highs. Governor Eli Remolona said Bangko Sentral ng Pilipinas now sets policy using scenarios that factor in oil prices and the severity of the weather event.

Speaking Wednesday on a panel at the IMF and World Bank annual meetings in Bangkok, Remolona said the worst of El Niño's impact on prices is still to come, with effects expected from November through February. He said maintaining price stability remains the central bank's priority.

Inflation and rice prices

Philippine inflation accelerated to 7.2% in September from 6.1% in August, with rice prices up 18%, according to the Philippine Statistics Authority. The world's biggest rice importer is also exposed to food supply risk.

Agriculture Secretary Francisco Tiu Laurel has warned that a fresh drought could squeeze domestic supply. Larger Philippine purchases could add demand to a global market already jolted by El Niño and export curbs, and the UN Food and Agriculture Organization has raised its rice price index for six consecutive months to a 20-month high.

We're holding our breath, but we have to be prepared for the worst.

— Eli Remolona

Rate hike expectations

The central bank lifted its benchmark rate by 25 basis points to 5% in August to keep a lid on the runaway inflation. According to Aris Dacanay, senior ASEAN economist at HSBC Bank, in a note Wednesday, the BSP should deliver another quarter-percentage hike next week to 5.25%, followed by another same-sized hike in December.