BSP may pause in April — Moody’s

By Katherine K. Chan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) may pause at its next meeting rather than immediately reverse its easing cycle amid oil price spikes and the peso’s depreciation, Moody’s Analytics said.   

“I think it is unlikely for the BSP to immediately shift back to a tightening cycle while it is still on an easing path, but the risk 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 odds of monetary policy tightening. 

“The key issue is whether the rise in oil prices proves temporary or sustained,” she said.

“A short-lived spike is something the BSP can usually look through, but persistently elevated oil prices that push the inflation outlook materially above the BSP’s 2%-4% target range would likely lead to a longer pause, and eventually raise the possibility of a hike if second-round effects begin to appear 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 means households consuming an average of 200 kWh monthly will pay about P129 more in 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 company uses for its power supply.

BSP Governor Eli M. Remolona, Jr. earlier said they could be forced to hike rates once oil price hits $100 per barrel as it could bring inflation past 4% or the upper end of their target 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 would be raising its policy rate for the first time since October 2023.

The BSP has followed an easing path since August 2024, delivering a cumulative 225-basis-point cut which brought the key interest rate down to an over three-year low of 4.25%.

The threat of Iran’s attacks has kept most ships from getting through the Strait of Hormuz, a vital oil transit point.

On Friday, the price 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 ongoing oil crisis could lead to a fuel shortage and eventually weigh on local consumer prices. 

“Headline inflation could surge well above BSP’s 2-4% target and household purchasing power could be further eroded, hurting consumption spending,” Nomura analysts said.

“The country does not maintain strategic oil reserves, so a prolonged conflict could lead to energy supply shortages, which may also 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 supply shocks.

Nomura said the BSP will likely hike the policy rate aligned with its price stability mandate, but it may opt to hold if the oil-driven inflation uptick ends up short-lived.

“BSP remains orthodox in its inflation-targeting mandate and will hike the policy rate aggressively, adding to growth headwinds,” it said.

“In the positive scenario, we see only a temporary breach of the inflation target, which BSP will likely look through, especially when the output gap remains negative, allowing it to maintain policy settings,” it added.

In an e-mailed response to questions from BusinessWorld, an International Monetary Fund spokesperson said they are currently “assessing the potential impact on the global economy and the region, including the Philippines” of the ongoing 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 stand pat at its April 23 meeting, Moody’s Ms. Tan noted.

“Aside 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 stay on hold also support a cautious stance at the next 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 as it sank to new record-lows this month.

On Thursday, the peso closed at a 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 remains present in the foreign exchange (FX) market to prevent sharp movements that could impact inflation, a stance Nomura analysts said the central bank will likely maintain.

“On FX policy, we think BSP has relatively high reserve adequacy and will therefore likely maintain active interventions to stem FX volatility,” Nomura said.

NO STAGFLATION
Meanwhile, Ms. Tan ruled out potential stagflation as inflation is unlikely to remain high for long on expectations of a short-lived oil crisis.

“As for stagflation, this is not our baseline,” she said. “We expect the impact of the Middle East conflict on oil prices to be temporary and do not see it causing a sustained rise in inflation.”

“However, a prolonged supply shock would raise production costs, weaken demand, and push inflation higher. For the Philippines, which imports more than half of its energy requirements, higher global commodity prices remain a significant risk to both growth and price stability,” Ms. Tan added.

Inflation averaged 2.2% as of February, with the monthly figure settling within the central bank’s target band for two straight months.

The Philippine Statistics Authority will release the March inflation report on April 7.