Slow growth to keep BSP on hold despite oil price shocks

By Katherine K. Chan, Reporter

TEPID ECONOMIC GROWTH will likely force the Bangko Sentral ng Pilipinas (BSP) to stand pat until yearend even as oil price shocks amid the Middle East war are expected to stoke inflation, Fitch Solutions unit BMI said. 

In a commentary on Monday, BMI said oil price pressures may push inflation beyond the central bank’s 2-4% target in the coming months, bringing it to a full-year average of 3.2%. This was slightly higher than its previous estimate of 3.1%.

“While we had previously expected the BSP to cut rates at its April meeting, the US-Iran conflict upended this view,” BMI said. “Inflation is likely to breach the BSP’s 2-4% inflation target range in the coming months, but sluggish growth will keep the BSP on hold rather than tighten.”

This came after the BSP maintained its policy rate in an off-cycle meeting last week as it looked past first-round inflation effects of the ongoing oil crisis, adding that tightening now may delay the economy’s recovery.

The BSP is scheduled to hold a regular policy review on April 23.

The Middle East war continues to escalate a month after the US and Israel’s initial attacks on Iran, with Iran still denying US President Donald J. Trump’s claims of resolution.

Locally, pump prices remain elevated as ongoing disruptions jeopardize the country’s oil supply. The Philippines imports over 90% of its oil from the Middle East, making it vulnerable to current oil shocks.

Last week, the central bank likewise revised its macroeconomic forecasts, with inflation now seen to reach 5.1% this year from 3.6% previously. 

It also trimmed its growth forecast to 4.4% from 4.6% for 2026 but maintained its 5.9% projection for 2027.

For BMI, tightening this early would be a “premature” move by the central bank as price pressures prove supply-driven and with growth still sluggish.

“All that said, we think it is premature to forecast rate hikes from the BSP,” it said. “While inflation will probably rise significantly, the BSP notes that it will be supply-driven and monetary policy is not well placed to tackle that. Moreover, softer growth will weaken the case for rate hikes.”

The BSP last raised its rates in October 2023 in an off-cycle move. It has followed an easing path since August 2024, reducing key borrowing costs by a total of 225 basis points (bps) to an over three-year low of 4.25%.

Its last few cuts came amid the flood control corruption fallout which dragged 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 pausing at its April meeting as he noted that second-round price effects will likely manifest within the second quarter.

“For now, we see another rate hold at the BSP’s April meeting as the fundamental supply issue remains unresolved and the economy keeps posting tepid performance,” Mr. Agonia told BusinessWorld in an e-mail.

“The upcoming March inflation reading will largely see first-round effects in the headline print. So far, we’re seeing early signs of second-round effects in transportation, food, and to some extent, food service activities,” he added.

Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., also noted that second-round inflation may be felt after two to three months, with major risk looming from wages.   

“Second‑round inflation effects usually show up after two to three months, with early pressure now visible in transport, logistics, food distribution, and power‑intensive industries — the key 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 escalating inflation pressures weigh on the policy outlook.   

“First-round effects on inflation may show in the data as soon as March and begin to breach the upper limit from April as second-round spillover effects emerge,” it said.

“A gradual tightening in policy settings from April would provide a strong signal of BSP’s commitment to proactively manage inflationary pressures and maintain macroeconomic stability,” it added.

BMI also warned about a possible rate hike later this year, particularly if the second-round price pressures worsen amid a prolonged Middle East war.

“Given that fuel prices largely dictate the cost of logistics that underpin the modern economy, a prolonged conflict even beyond our ‘Extend to End’ scenario would leave strong, broad-based second-round inflationary pressures in its wake, prompting the BSP to hike,” it said.

However, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia Economist Meekita Gupta said the BSP’s move last week has raised the bar higher for any rate hike.   

“Our main takeaway from this anticlimactic off-cycle meet is that the scheduled sit-down in three weeks is no longer ‘live’ — assuming global oil prices don’t reach a new high — as the Board has set a very high bar for any action,” they said in a separate note on Monday.   

While they see the BSP standing pat until end-2027, Mr. Chanco and Ms. Gupta noted that risks remain of potential tightening later this year or early next year.