The Pacific is warming towards what US forecasters say will probably be the strongest El Niño since records began in 1950, a weaker version of which halved the paddy harvest a decade ago and quadrupled inflation.
The event will peak between late 2026 and early 2027, according to First Capital Research, which benchmarks it against the 2015-2016 El Niño. That episode cut rice production by roughly half, lifted headline inflation to 8% from 2% and forced the Central Bank to raise interest rates by 100 to 125 basis points. The US National Oceanic and Atmospheric Administration puts the odds at nearly 70% that this one exceeds it and every other event in the modern record.
“A possible El Niño skews inflation outcomes to the upside, which reinforces persistent macro pressures,” First Capital said in a report.
At stake is the disinflation secured over the past several years. First Capital models two paths, neither benign. A severe repeat would push food inflation to 10% to 12% from late 2026 through 2027 and hold it there for about 24 months, with fuel adding two to three percentage points in 2027 and 2028. A moderate event would produce 5% to 7% for 12 to 18 months. Both open a wide band in the headline rate from late 2026, from roughly 4% to more than 7%. The asymmetry is the point: little room for inflation to undershoot over the next two years, considerable room
for it to overshoot.
A Warmer Pacific, a Drier Monsoon
El Niño is a periodic warming of the central and eastern Pacific that weakens the trade winds driving Asia’s monsoons, typically cutting rainfall across the region. It recurs every few years and varies widely in strength.
NOAA’s August forecast marked an upgrade from an earlier projection that this event would rank among the largest rather than surpass them all. First Capital said early indicators resemble the 2015-2016 cycle closely enough to raise the risk of comparable disruption here.
From Paddy Field to Loan Book
The damage arrives in stages, First Capital said, and the sequence is documented from the last cycle.
Weak rains hit the paddy harvest and agricultural exports first, the channel that produced the roughly 50% production decline in 2015-2016. Hydropower generation falls next as reservoirs draw down, and utilities burn diesel to fill the gap. Rising food
and fuel imports then press on the trade balance, which last time kept deteriorating after the weather event had passed.
Bad loans come last, concentrated in agriculture-linked microfinance and small business lending. Banks have already named drought and flood damage to agriculture as a driver of rising defaults, First Capital said.
The Fiscal Bill Arrives Late
Government spending follows the same lag. After 2015-2016, the state increased fertiliser subsidies, settled crop insurance claims and raised transfers to agricultural and irrigation institutions. Outlays peaked in 2016 and spilt into 2017, weakening the primary balance.
That is the sequence First Capital expects repeated, at a scale set by how far the Pacific warms between now and the new year.