El Niño preparedness may tame food-price surge, BSP says

KUALA LUMPUR, 25 AUGUST 2026 —

Early Action May Curb El Niño-Driven Inflation in Malaysia, Regional Economies

Speaking at the Philippine Economic Briefing in Davao City on Monday, Bangko Sentral ng Pilipinas (BSP) Deputy Governor Zeno Ronald R. Abenoja emphasized that proactive supply-side measures—particularly from governments—could cushion food supply chains from what meteorological agencies warn may become the strongest El Niño in decades, dubbed the “Godzilla El Niño.”

“This upcoming risk factor to agriculture, the so-called ‘Godzilla El Niño,’ is something that our government is looking at very carefully and has already started preparations,” Abenoja said. “So, that hopefully can help mitigate the inflation pressures across regions, across the country.”

The Philippine Atmospheric, Geophysical and Astronomical Services Administration (PAGASA) has projected that weak to moderate El Niño conditions in the tropical Pacific could intensify into a strong event by the third quarter of 2026. From October 2026 to January 2027, the Philippines is expected to face “very strong” El Niño conditions, characterized by a strengthened southwest monsoon, increased tropical cyclone activity, and severe dry spells that threaten agricultural production.

Abenoja noted that the Philippine government has initiated contingency plans, including adjusting planting calendars, expanding irrigation infrastructure, and promoting drought-resistant crop varieties to sustain food output during adverse weather.

The Department of Agriculture in the Philippines has warned that agricultural output could decline by 20% to 30% if a “Super El Niño” materializes, a scenario that would likely reverberate across regional food markets, including Malaysia, where rice and other staples are key import items.

Abenoja highlighted regional disparities in inflation, particularly in Mindanao, where logistical inefficiencies and elevated fuel costs—amplified by recent energy shocks—have intensified price pressures on food supplies.

“Transportation costs have increased quite dramatically, and that has affected some prices for food supply,” he said. “The National Government is closely monitoring this to ensure food supply remains adequate moving forward.”

Economists tracking the region’s inflation dynamics suggest that El Niño-driven food price spikes could prompt further monetary tightening by central banks, including Bank Negara Malaysia (BNM), to curb second-round inflation effects.

Miguel Chanco, Chief Emerging Asia Economist at Pantheon Macroeconomics, said El Niño-related food inflation risks could push the BSP to resume rate hikes later in 2026, particularly if crop yields are affected late this year or early 2027.

“In terms of what would warrant further tightening, I suspect that it would come from food inflation risks, especially if El Niño materializes late this year or early next, affecting crop yields and sending food prices up,” Chanco told BusinessWorld in an email.

However, he added that governments may also deploy non-monetary policies—such as price controls or subsidies—to address food price shocks, as seen in previous episodes.

In Malaysia, where food and non-alcoholic beverages account for 37.75% of the consumer price basket—the highest weight among components—food inflation has already shown signs of strain. In July 2026, the food and non-alcoholic beverages index rose 5.2%, while rice inflation hit a two-year high of 17.1%.

Abenoja previously indicated that the potential impact of a super El Niño is among the risks the BSP is factoring into its full-year inflation outlook. The BSP’s latest forecast places year-end inflation at 6.4%, though this projection does not yet incorporate the projected effects of El Niño. Inflation is expected to ease to 4.5% in 2027 and approach the central bank’s 3% target by 2028.

The BSP also warned in its latest Monetary Policy Report that El Niño-driven disruptions to rice production could keep headline inflation above its 3% target over the medium term.

Regional inflation dynamics remain a concern. Deutsche Bank Research noted in an August 21 report that second-round effects from earlier price shocks are still filtering through the economy, with approximately 80% of items in the Philippines’ consumer basket recording above-trend inflation since the onset of global supply chain disruptions in early 2026.

“This suggests that inflationary pressure in the Philippines is still broad-based and that spillover effects are likely still working their way through the economy,” the bank stated.

Deutsche Bank recommended a 25-basis-point (bp) policy rate hike by the BSP on August 27 to further dampen price pressures and stabilize real incomes. Capital Economics echoed this view, predicting a final 25-bp increase to bring the benchmark rate to 5%, marking the end of the current tightening cycle.

“All told, we think policymakers will opt for a further 25-bp hike next week to add to the 50 bp of tightening delivered so far in this cycle,” said Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics. “But, so long as oil prices drop back as we expect, that is likely to mark the end of the tightening cycle as the BSP shifts its attention to supporting the economy.”

The BSP has raised key borrowing rates by a cumulative 50 bps since April 2026, bringing the benchmark rate to 4.75%. A BusinessWorld poll conducted last week found that 19 of 24 analysts expect another 25-bp increase on August 27, while the remaining five anticipate a pause.

The Monetary Board is scheduled to hold its fourth rate-setting meeting on August 27, followed by reviews on October 22 and December 17.

For Malaysia, where food security and inflation management remain policy priorities, the evolving El Niño threat adds pressure to existing supply chain vulnerabilities. The government has previously implemented measures such as targeted subsidies and buffer stock policies to stabilize food prices, and similar interventions may be considered if regional crop shortfalls emerge.

While the full extent of El Niño’s impact on Malaysian inflation remains uncertain, policymakers are expected to prioritize food supply stabilization and targeted fiscal support to prevent second-round inflation effects from taking hold.

Related: Bank Negara Malaysia