BSP: Rising oil prices add complexity to rate decisions – MUFG

Impact of Rising Oil Prices on Philippine Monetary Policy

Michael Wan, Senior Currency Analyst at MUFG, explores the potential effects of elevated oil prices and an extended closure of the Strait of Hormuz on the policy direction of Bangko Sentral ng Pilipinas (BSP). The current outlook anticipates two additional rate reductions, bringing the rate to 3.75% in 2026, assuming oil prices ease to US$70 per barrel. However, if oil remains in the US$90–100 per barrel range, inflation could surpass BSP’s 4% target ceiling in both 2026 and likely 2027, increasing the likelihood of a policy reassessment.

Balancing Inflation Pressures and Economic Slowdown

Would the BSP consider raising interest rates if the situation deteriorates and oil prices climb higher? At present, this appears unlikely. The crucial factor is whether the shock to supply is short-lived—similar to disruptions seen during COVID lockdowns—or if it signals a longer-term shift that could gradually lift inflation expectations.

The forecast currently expects the BSP to implement two more rate cuts, likely in June and October, contingent on the crisis being resolved by March 2026 and oil prices declining to US$70 per barrel by the second quarter of 2026.

If oil prices persist at US$90 per barrel, inflation is projected to exceed the BSP’s 4% upper target in 2026, before moderating to around 3.2% in 2027.

Should oil prices remain above US$100 per barrel, inflation in the Philippines would likely stay above the 4% threshold not only in 2026 but also well into 2027.

In such a scenario, inflation could become more entrenched, affecting both the rate and expectations of inflation. This may prompt a policy rate adjustment, even if it coincides with a weaker economic outlook.

(This report was generated with assistance from artificial intelligence and subsequently reviewed by an editor.)