By Katherine K. Chan, Reporter
THE BANGKO SENTRAL ng Pilipinas (BSP) may pause at its next meeting fairly than immediately reverse its easing cycle amid oil price spikes and the peso’s depreciation, Moody’s Analytics said.
“I feel it’s unlikely for the BSP to instantly shift back to a tightening cycle while it remains to be on an easing path, but the danger of a prudent and prolonged pause has clearly increased,” Moody’s Analytics Assistant Director and Economist Sarah Tan told BusinessWorld in an e-mail.
Ms. Tan noted that the central bank can tolerate temporary oil price spikes, but a sustained uptrend in oil prices potentially driving transport and electricity costs higher would raise the chances of monetary policy tightening.
“The important thing issue is whether or not the rise in oil prices proves temporary or sustained,” she said.
“A brief-lived spike is something the BSP can normally glance through, but persistently elevated oil prices that push the inflation outlook materially above the BSP’s 2%-4% goal range would likely result in an extended pause, and eventually raise the potential of a hike if second-round effects begin to seem in transport fares, electricity rates, and inflation expectations.”
This month, the Manila Electric Co. (Meralco) hiked electricity rates by 64.27 centavos per kilowatt-hour (kWh) to P13.8161 per kWh from P13.1734 per kWh in February. This implies households consuming a mean of 200 kWh monthly can pay about P129 more of their electricity bill.
Meralco said electricity rates may surge further in April as soaring global fuel costs risk pushing coal and gas prices up, which the corporate uses for its power supply.
BSP Governor Eli M. Remolona, Jr. earlier said they may very well be forced to hike rates once oil price hits $100 per barrel because it could bring inflation past 4% or the upper end of their goal range.
The Monetary Board may consider tightening as early as its April meeting if oil prices stay elevated for long, Finance Secretary Frederick D. Go also said last week.
If realized, the central bank could be raising its policy rate for the primary time since October 2023.
The BSP has followed an easing path since August 2024, delivering a cumulative 225-basis-point cut which brought the important thing rate of interest right down to an over three-year low of 4.25%.
The specter of Iran’s attacks has kept most ships from getting through the Strait of Hormuz, an important oil transit point.
On Friday, the value of international benchmark Brent crude climbed 3.26% or $3.54 to a near four-year high of $112.19 a barrel, Reuters reported.
In a separate report, Nomura Global Markets Research said the continuing oil crisis may lead to a fuel shortage and eventually weigh on local consumer prices.
“Headline inflation could surge well above BSP’s 2-4% goal and household purchasing power may very well be further eroded, hurting consumption spending,” Nomura analysts said.
“The country doesn’t maintain strategic oil reserves, so a chronic conflict may lead to energy supply shortages, which may additionally be exacerbated by export bans in other sources, particularly China, which accounts for 25% of the Philippines’ refined petroleum imports,” they added.
The Philippines imports over 90% of its oil supply from the Middle East, making it vulnerable to current energy price and provide shocks.
Nomura said the BSP will likely hike the policy rate aligned with its price stability mandate, but it surely may opt to carry if the oil-driven inflation uptick finally ends up short-lived.
“BSP stays orthodox in its inflation-targeting mandate and can hike the policy rate aggressively, adding to growth headwinds,” it said.
“Within the positive scenario, we see only a short lived breach of the inflation goal, which BSP will likely glance through, especially when the output gap stays negative, allowing it to keep up policy settings,” it added.
In an e-mailed response to questions from BusinessWorld, an International Monetary Fund spokesperson said they’re currently “assessing the potential impact on the worldwide economy and the region, including the Philippines” of the continuing oil crisis from the Middle East conflict.
PESO SLUMP
Meanwhile, the peso’s recent slump amid the US-Israeli war on Iran could also push the BSP to face pat at its April 23 meeting, Moody’s Ms. Tan noted.
“Apart from the inflation risks stemming from the Middle East conflict, which could justify a prudent pause, the peso’s depreciation and the Fed’s decision to remain on hold also support a cautious stance at the following BSP meeting,” she said.
Uncertainties surrounding the war in Iran ignited safe-haven demand for the US dollar, reversing the peso’s short-lived recovery in February because it sank to recent record-lows this month.
On Thursday, the peso closed at a brand new all-time low of P60.10 against the greenback, falling by 58 centavos from its P59.52 finish on Wednesday, Bankers Association of the Philippines data showed.
The BSP has affirmed that it stays present within the foreign exchange (FX) market to stop sharp movements that might impact inflation, a stance Nomura analysts said the central bank will likely maintain.
“On FX policy, we predict BSP has relatively high reserve adequacy and can subsequently likely maintain energetic interventions to stem FX volatility,” Nomura said.
NO STAGFLATION
Meanwhile, Ms. Tan ruled out potential stagflation as inflation is unlikely to stay high for long on expectations of a short-lived oil crisis.
“As for stagflation, this shouldn’t be our baseline,” she said. “We expect the impact of the Middle East conflict on oil prices to be temporary and don’t see it causing a sustained rise in inflation.”
“Nonetheless, a chronic supply shock would raise production costs, weaken demand, and push inflation higher. For the Philippines, which imports greater than half of its energy requirements, higher global commodity prices remain a major risk to each growth and price stability,” Ms. Tan added.
Inflation averaged 2.2% as of February, with the monthly figure settling throughout the central bank’s goal band for 2 straight months.
The Philippine Statistics Authority will release the March inflation report on April 7.