PHL central bank may pause easing amid inflation risks from oil shock

By Katherine K. Chan, Reporter

FURTHER MONETARY POLICY easing may be delayed as inflation could heat up again as oil prices surge amid a widening conflict in the Middle East, analysts said.

Marco Antonio C. Agonia, an economist at the University of Asia and the Pacific, said the Bangko Sentral ng Pilipinas (BSP) may opt to stand pat before easing further to anchor its inflation expectations, considering the latest oil shock is a supply-driven issue.

“The higher inflation scenario due to these spikes could delay the BSP’s easing path, depending on the severity of the conflict,” Mr. Agonia told BusinessWorld in an e-mail.

“Being a supply-driven episode, the BSP cannot directly address this type of inflation through rate hikes,” he added. “Instead, the BSP may delay its rate cuts to anchor inflation expectations and prevent second-round inflation drivers from springing up.”

Reuters reported that oil prices surged on Monday as military conflict in the Middle East looked set to last weeks, threatening to upend a global economic recovery and perhaps reignite inflation.

Military strikes by the United States and Israel on Iran showed no sign of lessening, while Iran responded with missile barrages across the region, risking dragging its neighbors into the conflict.

All eyes were on the Strait of Hormuz where around a fifth of the world’s seaborne oil trade flows and 20% of its liquefied natural gas. While the vital waterway has not yet been blocked, marine tracking sites showed tankers piling up on either side of the strait wary of attack or maybe unable to get insurance for the voyage.

In a report dated March 1, Nomura Global Markets Research said every 10% increase in global oil prices could add 0.5 percentage point (ppt) to Philippine inflation, the largest impact, on par with India, seen in the region.

“Still the pass-through to domestic retail fuel prices will be significant and quick, exerting substantial upward pressure on headline CPI (consumer price index) inflation,” Nomura said.

“By our estimates, every 10% rise in oil prices could add about 0.5 ppt to CPI inflation, which suggests headline inflation could return to the upper end of BSP’s 2-4% target this year, instead of averaging at 2.5% as our forecasts envisage.”

The Philippines is a net importer of crude oil, making the country extremely vulnerable to global price swings.

Analysts already expect inflation to be on an uptrend this year, with costlier oil prices among the sources of inflationary pressures.

A BusinessWorld poll of 17 analysts yielded a median estimate of 2.4% for the February inflation print, faster than the 2% in January and the 2.1% seen a year ago.

If realized, this would be the fastest clip in 13 months or since the 2.9% in January 2025.

The BSP expects inflation to average 3.6% by yearend.

However, Mr. Agonia noted that inflation might not go as high as the 2022 levels when geopolitical tensions between Russia and Ukraine jolted the global oil market as well, adding that oil prices typically normalize as soon as such conflicts cease.

“However, it is unlikely that we will see inflation figures similar to the 2022 Russia-Ukraine conflict due to the (so far) relatively contained scale of the conflict,” Mr. Agonia said. “Stable food prices may also keep inflation from breaching the 4% target over a prolonged period of time.”

BSP Governor Eli M. Remolona, Jr. has noted that the policy path ahead is now less certain as they see “tentative” signs of a recovery in confidence even as inflation expectations remain “manageable.”

The central bank trimmed the key interest rate last month by 25 basis points (bps) to an over three-year low of 4.25%. Its sixth straight cut brought its total reductions to 225 bps since it began easing in August 2024.

CURRENT ACCOUNT DEFICIT
Meanwhile, think tanks warned that costlier oil also risks widening the country’s current account deficit (CAD). 

“Our analysis shows that every $10/bbl (barrel) oil price increase could decrease the current account position across Asian economies by around 0.2-0.9% of GDP, with Thailand, Singapore, Taiwan, India and the Philippines seeing bigger hits purely from a current account perspective,” MUFG Research Senior Currency Analyst Michael Wan said in a report on Monday.

The Philippines’ current account balance stood at a $12.5-billion deficit by the end of the third quarter, based on latest central bank data. This was equivalent to -3.6% of gross domestic product (GDP).

The BSP expects the current account gap to end at $15.5 billion in 2025 or -3.2% of GDP, before narrowing to $15.3 billion or -3% of GDP this year. 

Mr. Wan said the country’s current account gap could settle around 2%-3% of GDP this year “despite softer imports and domestic demand.”

Nomura analysts also noted that a wider current account deficit amid rising oil prices could weigh on the peso and reinforce a pause by the central bank. 

“The country’s relatively large net energy imports suggest an increase in oil prices could put the CAD back on a widening path, exerting currency pressures and adding to the likelihood of unchanged BSP policy rates,” they said. 

Following back-to-back record lows in January, the peso began to recover last month as it returned to the P57-a-dollar level. 

The market is anticipating further depreciation amid worries over geopolitical risks from the attacks on Iran, with the peso likely to trade between P57.40 and P58 per dollar this week. — with Reuters