Middle East war re-escalation, higher oil prices may drag peso to P64.50

THE PESO could plummet to as much as P64.50 against the dollar if the Middle East conflict further escalates and drives global oil prices higher, MUFG Global Markets Research said.

In its foreign exchange outlook for June, the Japan-based think tank said a re-escalation of the Iran conflict and a fresh spike in oil prices could bring the peso above P62 to as high as P64.50 per dollar.

“On the global front as well, the Philippine peso will also be sensitive if there is a ‘Super El Niño’ event and if the Fed turns more hawkish moving forward — arguably more so than other G10 and lower-yielding Asia currencies given its status as a current account deficit economy,” MUFG analysts also said in their report published late on Monday.

Based on MUFG’s forecast, the local unit will likely touch the P62 mark this quarter, before strengthening versus the dollar to P61.50 by the third quarter and P61 by the last quarter.

Its baseline also sees the local currency recovering to trade below P61 as the conflict eases and the greenback weakens.   

By the first quarter of 2027, the peso-dollar exchange rate could be back to P60.50, MUFG said.

Since the onset of the Middle East conflict on Feb. 28, the peso has been on a steady decline. It has moved to the P61-a-dollar level from the P58 range before the war.

Month on month, the local unit lost 10.5 centavos to close at P61.59 against the greenback on May 29 from its P61.485 per dollar finish on April 30. It plunged to an all-time low close of P61.75 on May 18 and 19.   

The Bangko Sentral ng Pilipinas (BSP) told Reuters on Monday that its foreign exchange market intervention remains limited to smoothening out sharp swings that could stoke inflation and potentially de-anchor inflation expectations.

Meanwhile, MUFG said heated inflation and signs of broadening spillover effects may still prompt the central bank to keep tightening monetary policy.

For the Japanese think tank, the key policy rate could be raised to at least 5.25% from 4.5%.

“From a local perspective, with the sharp surge in domestic CPI (consumer price index) pressures coupled with some initial signs of second-round effects, we see BSP hiking rates by at least 75 bps (basis points) more, bringing the policy rate to 5.25%, and more so if risks materialize,” it said.

The Monetary Board hiked benchmark interest rates by 25 bps to 4.5% in April, marking its first tightening in over two years as the Middle East war led to spiraling domestic prices.

BSP Governor Eli M. Remolona, Jr. said last month that they are considering an off-cycle hike before their June 18 meeting amid growing concerns over inflation expectations. 

The central bank also said it will take all necessary actions, including stronger measures, to temper inflation and steer it back to their 2%-4% tolerance range. 

However, Pantheon Macroeconomics said an aggressive policy stance may be unnecessary if the May inflation print meets the central bank’s projections.

This came after two straight months of misses, as the faster-than-expected transmission of oil shocks on the prices of key commodities pushed the headline print past the BSP’s target and forecasts.

“No such surprise this time will likely mean the most aggressive rate options — an off-cycle hike or 50 bp move — are off the table,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said in a separate note on Tuesday.

The central bank said inflation could come in between 7.1% and 7.9% in May, driven by a weaker peso and costlier rice, vegetables, and meat.   

The lower end of the forecast means inflation will be slower than the over three-year high of 7.2% in April, while the upper end brings inflation to its fastest since February 2023.

For Mr. Chanco, the headline clip will likely settle at 7.5% as the lingering effects of elevated global oil prices continue to weigh on housing and utilities inflation.

A BusinessWorld poll of 16 economists conducted last week yielded a median estimate of 7.9% for May inflation.

The Philippine Statistics Authority is set to release the May inflation report on Friday, June 5.

Still, the BSP’s tightening cycle may be short lived as MUFG analysts expect the central bank to start cutting rates again next year to bolster the economy as oil prices ease.

This as MUFG noted that emerging signs of the government’s catch-up spending may have limited impact on the country’s growth.

In April, government spending climbed by 11.14% year on year to P505.4 billion from P454.8 billion, latest data from the Bureau of the Treasury showed.

“(T)his improvement seems to be driven more by transfers to regional governments rather than spending on projects and so the actual growth impact maybe more limited for now,” it said. “Net-net, we see BSP likely reversing rate hikes in 2027 assuming oil prices decline and given the soft starting point of the economy. — Katherine K. Chan