By Katherine K. Chan, A reporter
BANGKO SENTRAL ng Pilipinas (BSP) may be a little slow in it next meeting rather than quickly reversing its cycle of ease between rising oil prices and depreciating the peso, Moody’s Analytics said.
“I think it is unlikely that the BSP will quickly switch to a tightening cycle while it is still on an easy path, but the risk of a prudent and long-term pause has clearly increased,” said Moody’s Analytics Associate Director and Economist Sarah Tan. BusinessWorld by email.
Ms. Tan noted that the central bank can tolerate a short-term increase in oil prices, but continued increases in oil prices that may drive up transportation costs and higher electricity costs will increase the likelihood of monetary policy tightening.
“The important issue is whether the rise in oil prices is temporary or ongoing,” he said.
“A short-term increase is something the BSP tends to look at, but continued increases in oil prices pushing the inflation outlook above the BSP’s target range of 2%-4% may lead to a prolonged pause, and eventually increase the likelihood of a hike if the effects of the second round start to show in fares, electricity prices, and inflation.”
This month, Manila Electric Co. (Meralco) raised electricity rates by 64.27 centavos per kilowatt-hour (kWh) to P13.8161 kWh from P13.1734 per kWh in February. This means that households using an average of 200 kWh per month will pay about P129 more on their electricity bill.
Meralco said electricity prices may increase significantly in April as rising fuel prices around the world threaten to raise the prices of coal and gas, which the company uses for its electricity.
BSP Governor Eli M. Remolona, Jr. previously he said they may be forced to increase prices if the price of oil reaches $100 per barrel as it may bring inflation past 4% or at the end of the target range.
The Monetary Board may consider tightening before its April meeting if oil prices remain high, Finance Secretary Frederick D. Go also said last week.
If possible, the central bank will be raising its policy rate for the first time since October 2023.
The BSP followed an easy path from August 2024, delivering a cumulative 225 basis point cut that brought the key interest rate down to a three-year low of 4.25%.
The threat of an attack by Iran has kept many ships from entering the Strait of Hormuz, an important oil transit area.
On Friday, the price of international benchmark Brent crude rose by 3.26% or $3.54 to close. four-year high of $112.19 a barrel, Reuters reported.
In a separate report, Nomura Global Markets Research said the ongoing oil crisis could cause fuel shortages and eventually weigh on local consumer prices.
“Inflation may rise above the BSP’s target of 2-4% and domestic purchasing power may be eroded, hurting spending,” Nomura analysts said.
“The country does not maintain oil reserves, so a prolonged conflict could lead to energy shortages, which could be exacerbated by the ban on exports from other sources, especially China, which accounts for 25% of the Philippines’ refined petroleum imports,” he added.
The Philippines imports 90% of its oil from the Middle East, making it vulnerable to current energy price and supply shocks.
Nomura said the BSP is likely to raise the policy rate in line with its mandate for price stability, but may choose to hold if oil-driven inflation ends up being temporary.
“The BSP remains unchanged in its job of controlling inflation and will increase the policy rate aggressively, adding to the growth of winds,” he said.
“In a positive scenario, we see a short-term breach of inflation targets, which the BSP will probably look at, especially if the output gap remains negative, allowing it to maintain policy settings,” it added.
In response to email inquiries from BusinessWorlda spokesman for the International Monetary Fund said they are currently “assessing the potential impact on national and regional economies, including the Philippines” of the ongoing oil crisis stemming from conflicts in the Middle East.
THE PESO SLUMP
Meanwhile, the latest peso A meltdown amid the US-Israel war against Iran could also push the BSP to adjourn its April 23 meeting, Moody’s Ms. Tan noted.
“Besides the inflationary risks stemming from the Middle East conflicts, which could justify a temporary suspension, the depreciation of the peso and the Fed’s decision to remain on hold also support a cautious stance on the next BSP meeting,” he said.
Uncertainty surrounding the Iran war has created a need for a safe haven for the US dollar, temporarily delaying the peso’s recovery in February as it fell sharply to new records this month.
On Thursday, the peso closed at a record low of P60.10 against the greenback, down 58 cents from its close of P59.52 on Wednesday, data from the Bankers Association of the Philippines said.
The BSP has confirmed that it remains in place in the foreign exchange (FX) market to prevent sharp movements that could lead to devaluation, a position Nomura analysts say the central bank will maintain.
“On FX policy, we think the BSP has very high adequacy and will therefore maintain effective interventions to curb FX volatility,” Nomura said.
THERE IS NO FINISH
Meanwhile, Mrs. Tan dismissed the potential volatility as inflation is unlikely to remain high for long in anticipation of a short-term oil crisis.
“As for stagflation, that’s not our bottom line,” he said. “We expect the impact of the Middle East conflict on oil prices to be temporary and we do not see it causing sustained inflation.”
“However, long-term supply shocks can increase production costs, reduce demand, and cause inflation to rise. In the Philippines, which imports more than half of its energy needs, high global commodity prices remain a major threat to both growth and price stability,” Ms. Tan added.
Inflation has reached 2.2% since February, with the monthly rate staying within the central bank’s target band for two consecutive months.
The Philippine Statistics Authority will release the inflation report for March on April 7.
