MANILA: The Bangko Sentral ng Pilipinas (BSP) may be able to keep interest rates steady rather than resort to defensive tightening if the global energy crunch caused by the Middle East conflict pushes domestic inflation above target only briefly.
In a report, economists at Nomura Global Markets Research said price pressures could exceed the central bank’s 2% to 4% goal, reflecting the Philippines’ heavy reliance on imported oil.
But if the spike proves temporary, policymakers would have room to keep monetary settings supportive of economic growth.
“As a result, we would expect growth to be similar to our baseline scenario, with the policy rate unchanged and the government still able to implement catch-up spending plans on infrastructure projects, instead of being forced to prioritise emergency measures to avert an energy crunch and surging inflation,” Nomura said.
Violence in the Middle East has intensified following strikes by the United States and Israel on Iran, and Tehran’s retaliation against Gulf neighbours hosting American forces.
Disruptions in the Strait of Hormuz – a key route for roughly a fifth of global oil supply – have heightened concerns over energy prices.
Even before the turmoil, inflation had edged up to a 13-month high of 2.4% in February, though it remained within BSP’s target range.
The benign price environment had allowed the central bank to cut its key rate to a more than three-year low of 4.25% to support an economy still recovering from the fallout of a massive corruption scandal.
BSP governor Eli Remolona Jr has warned, however, that the central bank could raise interest rates if oil prices remain above US$100 for an extended period and the US dollar continues to strengthen.
Nomura said a more adverse scenario – in which the conflict drags on – could keep inflation elevated, eroding consumption just as remittances face risks from potential displacement of Filipino workers in the Middle East.
The Philippines’ lack of strategic oil reserves could also expose it to supply disruptions, while energy- saving measures may further weigh on growth.
In that case, Nomura said BSP would likely stick to its inflation-targeting mandate and raise rates aggressively, adding strain to the economy.
“As a large energy importer, the economy has significant exposures that are amplified under the negative scenario,” the bank said. — Philippine Daily Inquirer/ANN
