BSP: Oil-driven inflation complicates rate path – MUFG

MUFG’s Senior Currency Analyst Michael Wan assesses how higher Oil prices and a prolonged Strait of Hormuz closure could affect Bangko Sentral ng Pilipinas policy. Their base case still assumes two more cuts to 3.75% in 2026 as Oil falls to US$70/bbl, but sustained Oil at US$90–100/bbl would push inflation above the BSP’s 4% ceiling in 2026 and likely 2027, raising risks of a policy rethink.

Inflation risks versus growth headwinds

"Will BSP hike rates if the crisis worsens and oil prices spike further? We think the answer is likely “no” right now, but the key distinction is whether this is a temporary supply-side shock perhaps analogous to COVID lockdowns, or proves something more permanent with the potential to raise inflation expectations over time."

"Our current base case forecast is for the BSP to cut rates twice more to 3.75%, likely in June and October, but this is predicated on the crisis resolving by March 2026 and for oil prices to move to US$70/bbl by 2Q2026."

"A scenario of sustained oil prices at US$90/bbl will likely see inflation breach the upper-end of the BSP’s inflation target of 4% in 2026 before coming down to 3.2% in 2027."

"Meanwhile, risk scenarios of sustained oil prices above US$100/bbl will likely see inflation in the Philippines above the 4% upper-end inflation threshold not just for 2026 but also very likely 2027 as well."

"In the latter, we could well see more permanence in inflation rates (and not just price levels) and hence inflation expectations, and warrant a policy rate response, despite being accompanied with far weaker growth prospects."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)