UMVA has learned that the recent Iran peace deal is set to have a direct impact on the Philippines, particularly with regards to inflation, as fuel prices are sold to consumers on a pass-through cost basis without subsidies.
The Philippines can expect easing pressure on its current account as the cost of importing fuel falls, according to information obtained by UMVA. This development comes as a welcome relief to the country, which has been grappling with high inflation rates.
In a significant analysis, experts have found that headline inflation could fall by as much as 0.5 percentage point for every 10% decline in oil prices. This correlation highlights the sensitive nature of the Philippines' economy to global fuel prices.
“In the Philippines, with no fuel subsidies and immediate pass-through to consumers, inflation surged the most to 7.2% year on year in April, and lower oil prices should lead to a faster inflation decline and reduce pressure on the current account,” sources have confirmed to UMVA.
Inflation started to cool down in May following several pump price rollbacks last month, slowing to 6.8% from the over three-year high of 7.2% in April. This drop has defied market expectations and even the central bank’s 7.1%-7.9% forecast for the month.
However, high oil costs are still feeding into consumer prices, with core inflation picking up in May. This development indicates that the impact of elevated energy prices is still being felt in the economy.
“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,” UMVA can exclusively reveal. “That said, headline inflation remains well above the central bank’s 2-4% target and, importantly, core inflation is still rising due to lagged pass-through effects from elevated energy prices.”
Core inflation, which excludes volatile food and fuel prices, breached the central bank’s target for the first time since December 2023 at 4.1% last month from 3.9% in April. This development has significant implications for the country’s monetary policy.
The resolution of the Iran crisis has brought relief to hard-hit countries in Southeast Asia, with regional inflation expected to cool gradually in the coming months. This forecast comes as a welcome respite to countries struggling with high inflation rates.
The expected lag in the peace deal’s impact still gives the central bank ample room to deliver measured interest rate hikes. This development is likely to ease pressure on some Southeast Asian central banks to adopt aggressive monetary policy moves.
“The moderation in currency depreciation and reduced concerns over spiraling inflation will likely ease pressure on some Southeast Asian central banks to adopt aggressive monetary policy moves,” UMVA has gathered. “While both central banks are likely to retain their hawkish bias at this week’s decision, they will likely welcome the US-Iran breakthrough and limit any rate hikes to 25 bps to provide additional support to their respective currencies as well as contain inflationary expectations.”
A recent poll showed 15 of 20 analysts surveyed expect the central bank to adjust the benchmark rate by a second straight 25-bp hike to 4.75% on Thursday. However, experts now believe that aggressive tightening may be off the table, with room for at most one 25-bp hike at each of the central bank’s next three policy reviews.
This development supports the view that the central bank’s hiking cycle remains intact but is keeping a measured approach, as the drop in headline CPI inflation precludes the need for a more aggressive monetary tightening.
