BSP to pause easing as oil shock stokes inflation

THE BANGKO SENTRAL ng Pilipinas (BSP) could pause its easing cycle even as rising cost pressures due to the spike in global oil prices amid the war in Iran are expected to stoke inflation in the near term.

“Headline inflation could spike in March to April as fuel prices rise but with (average) inflation in ’26 and ’27 still within BSP’s inflation target range,” Citi Philippines said in an e-mailed note on Wednesday. “We maintain our call for a BSP pause but reserve the possibility of a shallow hiking cycle in the event oil prices turn more bullish versus Citi’s base-case.”

“The BSP Governor has indicated a rate hike possibility if oil prices reach $100 per barrel and the US dollar rallies, reversing its dovish policy stance in February… However, we maintain our base-case forecast for an extended BSP rate pause. The case for immediately hiking is not yet as compelling as during the 2022 oil shock which led to rate increases totaling multiple [percentage points].”

Last week, BSP Governor Eli M. Remolona, Jr. said headline 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.

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%.

Oil surged past $100 a barrel (/bbl) on Monday to the highest since mid-2022 as supply concerns due to the ongoing war in the Middle East drove up prices.

On Wednesday, Brent crude futures swung between gains and losses in volatile trade, falling 0.4% to $87.45 per barrel, while US crude was up 0.3% at $83.67 a barrel, Reuters reported.

The BSP sees inflation averaging 3.6% this year and 2.8% in 2027, according to its latest forecasts, which are based on assumptions that Dubai crude oil prices would average $64.66 and $64.08 per barrel, respectively, the February 2026 Monetary Policy Report showed.

The central bank said in the report that if oil prices average more than $65/bbl this year, this would push inflation further away from the 3% target, while if Dubai crude oil prices average $80/bbl in 2026 and 2027, headline inflation would breach the upper end of the 2%-4% tolerance band.

It added that these projections consider only direct effects and exclude potential second-round impacts.

Citi said oil prices of $80 to $90 per barrel could bring inflation closer to 4% by April, before easing in May to average 3.6% by yearend.   

“The near-term forecast change also covers expected increases in fuel and LPG (liquefied petroleum gas) prices, as well as electricity tariffs partially following higher coal prices,” the bank said. “We have yet to incorporate second-round impacts, e.g. public transport tariff hikes, nor broader core CPI (consumer price index) pressure from imported pass-through. These factors, however, could be penciled-in, along with a sharper inflation spike, if Citi’s oil bull-case scenario of Brent hitting $120/bbl in (the second quarter) draws closer.”

It said that in the event oil prices stay above $100 for multiple weeks, the BSP could deliver one or two 25-bp hikes. “Such scenario would risk de-anchoring inflation expectations thereby requiring a policy response.”

Meanwhile, Pantheon Macroeconomics said Philippine inflation may accelerate past the central bank’s “sweet spot” of 3% this month as hefty oil price hikes weigh on consumers.

In a note on Wednesday, Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco and Asia economist Meekita Gupta said headline inflation could pick up to 3.3% from 2.4% in February.

“We reckon the monthly average cost of petrol and diesel this month will jump by at least 23% and 24% month-to-month, respectively,… in stark contrast to the average decline of -1.4% in the three months to February,” they said.

“Transport inflation would leap comfortably above 5% in the March report if we’re right, a world away from the outright, albeit mild, deflation in January-to-February. This would push the headline to 3.3% from 2.4% previously, marking the first 3%-plus print in 19 months.”

Oil companies this week rolled out staggered fuel pump price increases amid the conflict in Iran. The Philippines is a net importer of oil and relies heavily on Middle East crude, which accounts for roughly 98% of its imports.

Meanwhile, Pantheon Macroeconomics expects inflation to average 3.2% this year, up slightly from its earlier projection of 3.1%.

“The firmer outlook for global oil prices throughout 2026 is also likely to mean that housing & utilities inflation, which responds with a slightly longer lag to global energy prices, should remain stickier for longer. In terms of monetary policy, our revised projections see inflation remaining within the BSP’s 2-to-4% target range. As a result, we reiterate our view that the target reverse repo (repurchase) rate will stay at 4.25% for the foreseeable future.”

GROWTH IMPACT
Citi added that the Middle East war could weigh on remittances and household consumption, which may affect first-quarter economic growth,

“The ongoing oil shock presents a headwind for the recovery: PH has announced a four-day workweek, which could reduce mobility and affect retail sales,” it said.

“Incoming remittances could also be impacted if PH workers from the Middle East are repatriated as result of the conflict. The resilience of household purchasing power will also be tested given the hike increase in fuel prices,” Citi added.

The economy has been in a slump since the second half of 2025 as investments, public consumption and government spending slowed amid weak sentiment due to the flood control corruption scandal.

Gross domestic product growth hit a post-pandemic low of 4.4% in 2025 as the economy only expanded by 3.9% in the third quarter and 3% in the fourth quarter — all well below the government’s 5.5%-6.5% target.

The BSP earlier said that the economy may start to rebound by the second half of the year, with growth averaging 4.6% by yearend, as they have seen signs of a tentative recovery in investor confidence. — Katherine K. Chan