By Katherine K. chan, reporter
There will be a possibility of slow economic growth Force the Bangko Sentral ng Pilipinas (BSP) to standstill until year-end, even as oil prices face shocks amid Middle East war Inflation, Fitch Solutions unit BMI said.
In a comment on Monday, BMI said oil price pressures could push inflation beyond the central bank's 2-4% target in coming months, pushing it to an average of 3.2% over the year. This was slightly higher than its previous estimate of 3.1%.
“Although we had previously expected the BSP to cut rates at its April meeting, the US-Iran conflict reversed this view,” BMI said. “Inflation is likely to break the BSP's 2-4% inflation target range in the coming months, but sluggish growth will keep the BSP in check rather than strengthening.”
It came as the BSP kept its policy rates unchanged at an off-cycle meeting last week as it noted the inflationary effects of the first round of the ongoing oil crisis, and said tightening now could delay the economy's recovery.
BSP is scheduled to hold a regular policy review on April 23.
A month after the initial US and Israeli attacks on Iran, the Middle East war continues to escalate, with Iran still seeking a solution from US President Donald J. Trump is denying the claims.
Locally, pump prices remain high as ongoing disruptions threaten the country's oil supplies. The Philippines imports more than 90% of its oil from the Middle East, making it vulnerable to current oil shocks.
Last week, the central bank similarly revised up its macroeconomic forecasts, with inflation now rising to 5.1% this year from 3.6%.
It cut its growth forecast for 2026 to 4.4% from 4.6%, but retained its 5.9% estimate for 2027.
As for BMI, tightening it early would be a “premature” move by the central bank as price pressures prove to be supply-driven and growth is still sluggish.
“All that said, we think it is too early to predict a rate hike from the BSP,” it added. “Although inflation will likely rise significantly, the BSP believes it will be supply-driven and monetary policy is not well placed to deal with it. Moreover, slower growth will weaken the case for a rate hike.”
BSP last raised its rates in October 2023 in an off-cycle move. It has adopted an easier path from August 2024, reducing key borrowing costs by a total of 225 basis points (bps) to a three-year low of 4.25%.
Its last few cuts came amid the fallout from flood control corruption, which drove growth to a post-pandemic low of 4.4% last year.
Marco Antonio C. Agonia, an economist at the University of Asia and the Pacific, also sees the BSP holding off on the April meeting as he said second-round price effects would likely manifest within the second quarter.
“For now, we see another rate hold in the BSP's April meeting as the basic supply issue remains unresolved and the economy's performance remains sluggish,” Mr Agonia said. businessworld In an e-mail.
“The upcoming March inflation readings will show first-round effects primarily in the headline print. So far, we are seeing early signs of second-round effects in transportation, food and, to a lesser extent, food service activities,” he said.
Jonathan L. Reyes, a senior consultant at Tacundong & Co. Ravelas also said that the second round of inflation could be felt after two to three months, with salaries being the biggest risk.
“The impact of second-round inflation is typically visible after two to three months, with the initial pressure now visible in transportation, logistics, food delivery and electricity-intensive industries – the main risk to watch is wages,” he said via Viber.
On the other hand, Deutsche Bank Research still expects the BSP to raise its benchmark rate by 25 bps to 4.5% next month to prioritize its price stability mandate as rising inflation weighs on the policy outlook.
“The first-round impact on inflation may become visible in the data in March and the upper bound breach may begin from April as the second-round spillover effects emerge,” it said.
“A gradual tightening of policy settings from April will provide a strong signal of the BSP's commitment to actively manage inflation pressures and maintain macroeconomic stability,” it said.
BMI also warned about a possible rate hike later this year, especially if a second round of price pressure worsens amid the prolonged Middle East war.
“Given that fuel prices largely determine the logistics costs that underpin the modern economy, a prolonged conflict even beyond our ‘expand-to-end’ scenario would leave strong, broad-based second-round inflation pressures in its wake, prompting a rise in BSPs.”
However, Pantheon Macroeconomics chief emerging Asia economist Miguel Chanco and Asia economist Mikita Gupta said the BSP's move last week had set the bar high for any rate hike.
“Our main takeaway from this anticlimactic off-cycle meeting is that the meeting scheduled in three weeks is no longer 'live' – assuming global oil prices do not reach a new high – because the board has set too high a threshold for any action,” he said in a separate note on Monday.
While they see the BSP standing until the end of 2027, Mr Chanco and Ms Gupta said the risk remains of a possible tightening later this year or early next year.