Rate hikes unlikely for now despite oil shock, MUFG says

By Katherine K. Chan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) is unlikely to hike rates in the near term even as oil price shocks due to the ongoing war in the Middle East are expected to weigh on inflation and the peso, MUFG Global Markets Research said.

“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,” MUFG Senior Currency Analyst Michael Wan said in a report on Monday.

Deutsche Bank Research said the economic impact of costlier oil may prompt Asian central banks to be more hawkish.

“Although most Asian economies have reduced their reliance on Iranian oil to negligible levels, they remain vulnerable to both inflation and growth shocks from higher oil prices,” it said in a report on Monday. “For now, Asian central banks are likely to view this as an inflationary shock, warranting a more hawkish bias.”

On Friday, BSP Governor Eli M. Remolona, Jr. said Philippine inflation could breach 4% if oil hits $100 a barrel, adding that if fuel prices rise sharply and persistently, they could be forced to tighten their policy stance anew.

The Monetary Board last hiked borrowing costs in October 2023. It began its current easing cycle in August 2024 and has lowered rates by a total of 225 basis points (bps), bringing the key policy rate to its lowest in over three years at 4.25%.

Brent crude oil price hit over $100 per barrel (/bbl) on Monday, the first time in over three years, as the ongoing war in the Middle East continued to disrupt oil trade from the region.

This puts Philippine inflation at risk of breaching the 4% mark this year until 2027 if this price level is sustained, said MUFG’s Mr. Wan.

“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 $70/bbl by 2Q2026. A scenario of sustained oil prices at $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.”

He said if the conflict is prolonged and results in “something more permanent in terms of destruction to global economic and energy supply capacity,” the central bank may need to raise rates again.

“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 by far weaker growth prospects.”

Meanwhile, Jose Mari Lacson, head of macroeconomics and impact investing at ATRAM Trust Corp., told BusinessWorld in a phone interview last week that they will revisit their BSP rate projections amid emerging risks to inflation due to oil shocks from the ongoing Middle East conflict.

ATRAM sees Philippine inflation averaging 3.2% by yearend, but he said it could end closer to 4% if the war lasts around three to six months.

Mr. Lacson said the BSP’s policy path would likely depend on the duration of the ongoing war in the Middle East and when government spending will recover, adding that a rebound in the first quarter would give the central bank “more reason” to stand pat.

He added that the peso could test new lows, potentially hitting P60 versus the dollar, if the Iran conflict is prolonged.

“So, right now, again depending on how long this goes, because our vulnerability is in our imports. Oil accounts for a substantial part of our imports bill,” Mr. Lacson said. “So, if oil surges back to, say, peak levels, this can push our peso closer to P60.”

Despite having record-high dollar reserves in February, Mr. Remolona said on Friday that the central bank does not have much appetite to intervene in the foreign exchange market as they only step in if inflationary risks emerge from the peso’s depreciation.

MUFG’s Mr. Wan likewise said the peso may weaken to over P60 per dollar if oil prices continue to soar, especially if the dollar stays strong and the US Federal Reserve becomes hawkish.

“From a FX (foreign exchange) and rates perspective, we think USD/PHP could trade between P59-P60 levels with $90 oil prices, P60-P61 levels with $100 oil prices, and above that if coupled with a stronger dollar and/or a hawkish Fed,” he said.

He added that higher oil prices could also cut gross domestic product (GDP) growth as besides inflation and the currency, the ongoing Middle East conflict could also impact energy-intensive sectors like manufacturing, transportation, travel, and food production, as well as remittances from migrant Filipinos, which help drive domestic consumption.

“Our current GDP forecasts for the Philippines of 4% in 2026 and 6% in 2027 are already below consensus, but if oil prices were to spike to $100/bbl on a sustained perspective, GDP may easily fall closer to 3.7% in 2026 and 5.7% in 2027, after incorporating the lagged impact of higher oil prices to the economy. If oil prices were to spike to $130/bbl, GDP will likely be cut by more than 1%, with GDP growth coming in at 3.4% and 5.4% in 2026 and 2027, respectively,” Mr. Wan said.

“Once again, these are probably under-estimates, and the negative impact could well be bigger after incorporating indirect spillovers which are much harder to accurately estimate now. How the Philippine government responds through fiscal policy support moving forward will also be key.”

The Asian Development Bank (ADB) also said it expects the war in Iran to drive up inflation in the Philippines.

“Smaller energy-importing economies, including the Philippines, Pakistan, and Sri Lanka, are likely to experience comparatively stronger macroeconomic effects,” ADB Chief Economist Albert F. Park said via X over the weekend.

“In these economies, higher oil prices tend to transmit rapidly into inflation and exchange rate pressures through widening current account deficits and increased foreign currency demand,” he added.

The ADB sees five ways the war could impact Asian countries: rising energy prices, currency depreciation, shipping and global trade disruptions, slower export growth, and aviation and logistics disruptions.

It said these economies should focus on stabilizing prices rather than aggressively tightening monetary policy, as it can add to financial volatility.

“Shielding consumers from higher domestic energy costs through price controls or subsidies could risk distorting market incentives and undermining the efficient allocation of resources,” said Mr. Park.

“Central banks should prioritize exchange rate smoothing and liquidity provision before tightening monetary policy aggressively, especially where inflation pressures originate externally,” he added.

The ADB also said that Asian countries should implement targeted fiscal measures toward vulnerable households rather than blanket measures, as they can “weaken fiscal positions without addressing underlying price pressures.”

ECONOMIC RECOVERY
China Banking Corp. Chief Economist Domini S. Velasquez said the government’s spending catch-up plan could spur economic recovery this year, but the ongoing crisis in Iran presents fresh risks.

“That 4.4% [growth] last year, it’s really a fiscal constraint. So, the government is saying they will spend more this year. They will spend the whole budget. So, we see an upside for this year,” she said on Money Talks with Cathy Yang on One News on Monday.

Asked about the impact of oil shocks on the country’s growth prospects, Ms. Velasquez said: “It is a downside but as mentioned, if we address it through the proper subsidies, targeted subsidies, time-bound, it might not be a fiscal drag, and we can spend more on other priorities.”

She said the government should provide fuel subsidies, particularly for oil-dependent sectors like transport, agriculture and fisheries, or allow fare increases for public transport, instead of cutting the excise tax on oil.

“Addressing the concerns of the transport sector immediately would be most effective, I would say, as opposed to maybe a rollback of excise taxes, which usually benefits the higher income segment.”

ATRAM’s Mr. Lacson added that an anticipated rebound in infrastructure spending as early as next quarter could drive the Philippine economy’s rebound in the coming months, following a slump late last year due to a graft scandal involving government projects.

“So, our assumption here is that by the second quarter, we’ll already see public construction or infrastructure spending (starting) to recover,” he said. “Meaning, not fully back to normal, but heading that way (or to) the path to recovery.”

In November 2025, infrastructure spending slumped by 45.2% year on year to P48 billion, latest Department of Budget and Management data showed, marking the fifth straight month of annual declines amid corruption allegations tied to government flood control projects. This dragged public investment, which was among the primary reasons for the GDP growth slowdown last year.

Mr. Lacson said infrastructure spending may remain sluggish this quarter but may begin to show some signs of growth in the second quarter.

“And the reason for this is because… I think the government is cognizant that they need to maintain a certain level of infrastructure spending to support growth,” he said. “Because if not, the long-term implications can be worrisome.” — with Justine Irish D. Tabile