MANILA: The Philippines is poised to be one of Asia’s biggest beneficiaries from the tentative peace deal between the United States and Iran, with lower oil prices expected to accelerate the country’s inflation slowdown, according to Nomura Global Markets Research.
In a research note, Nomura estimated that every 10% decline in oil prices could reduce Philippine inflation by about 0.5 percentage points. This is the largest disinflationary impact in the region and on par with India.
Nomura forecast Philippine inflation to average 5.5% this year. In May, inflation had already eased to 6.8% from 7.2% in April, although it remained above the Bangko Sentral ng Pilipinas’ (BSP) 2% to 4% target range. This brought the year-to-date average to 4.5%.
The investment bank also estimated that a 10% drop in oil prices could improve the Philippines’ current account balance by about 0.37 percentage point of gross domestic product, as lower energy costs reduce the country’s import bill.
“Absent fiscal subsidies, the immediate impact of lower crude oil prices will show up in a further drop in headline inflation, which already started easing in May.
“Nevertheless, the US-Iran peace deal offers a welcome reprieve for Asia, with the potential for stronger growth, lower inflation and reduced twin current account and fiscal pressures,” Nomura added.
Nomura’s outlook followed a sharp decline in global crude prices after the United States and Iran reached a tentative peace agreement that could lead to the reopening of the Strait of Hormuz, a key global energy shipping route.
The deal, which is expected to be formalised in Switzerland tomorrow, is seen to end more than three months of war in the Middle East.
Following the announcement, Brent crude prices fell roughly 25% from a month ago to below US$83 per barrel.
But despite the expected decline in headline inflation, Nomura maintained its view that the BSP’s rate hiking cycle remained intact as underlying price pressures remained elevated.
“This supports our view that BSP’s hiking cycle remains intact but it is keeping a measured approach, as the drop in headline consumer price index inflation precludes the need for a more aggressive monetary tightening,” it said.
Nomura said the central bank is also likely mindful of the risks posed by El Nino, particularly on food prices.
“However, if headline inflation falls more materially in the near-term due to the drop in oil prices, and core inflation peaks much earlier than our baseline of the fourth quarter, we acknowledge the risk that BSP could hike by a lower 50 basis points instead of another 75,” it added. — The Philippine Daily Inquirer/ANN
