Oil shocks, uncertainty muddy Philippine inflation forecasts, analysts say

By Katherine K. Chan, Reporter

ANALYSTS and economic managers are now finding it harder to precisely measure data in their inflation forecasts as rising uncertainty and the faster-than-usual transmission of oil price shocks challenge their models.

University of Asia and the Pacific (UA&P) economist Marco Antonio C. Agonia said analysts like himself typically use historical data and assumed relationships, both of which could still be adjusting to rapid developments from the unprecedented energy crisis.

“The highly uncertain situation tends to throw off forecasts because previous assumptions about the Philippine economy may no longer be as robust,” Mr. Agonia told BusinessWorld in an e-mail.   

Meanwhile, Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said they struggled to identify which items fueled inflation during the war’s first month in March, and which emerged later in April.

“We got most of the inflation items except for the transport component,” he told this paper in a Viber message. “We could not determine which part of the increases were captured in March and which ones kicked in last April.”

Inflation accelerated to 7.2% in April, its fastest pace in more than three years, driven by higher oil prices that pushed up the cost of food — particularly rice — and utilities. This was faster than the 4.1% in March and 1.4% a year earlier.

April was the second consecutive month that inflation exceeded both analysts’ forecasts and the Bangko Sentral ng Pilipinas’ (BSP) projections.

The BSP had expected the headline print to come in between 5.6% and 6.4% last month, while a BusinessWorld poll of 17 analysts yielded a median estimate of 5.5%.

UA&P’s Mr. Agonia likewise noted that the central bank’s forecasting model may also be “encountering similar constraints.”

Since last year, the BSP has used the Policy Analysis Model for the Philippines (PAMPh) and other workhorse models for economic surveillance, forecasting and informing monetary policy decisions.

The PAMPh uses 290 equations, significantly more than the around 24 used in its older multi-equation model, and assesses more sectors and transmission channels to determine inflation drivers.

“Institutions are now likely revisiting and re-testing their forecasting models and assumptions to account for recent surprises,” Mr. Agonia added.

Under its inflation targeting framework, the central bank noted that inflation could overshoot its 2%-4% target in circumstances such as oil price volatility, where the BSP may have limited control.

Mr. Agonia also noted that oil prices rose more rapidly than during the 2022 energy crisis amid Russia’s Ukraine invasion, further disrupting projections reliant on historical patterns.

“Furthermore, when we tack on the insight that this particular oil price shock progressed much faster than the most recent previous one, namely, the Russia-Ukraine conflict, it adds further unknowns that complicate forecasting key indicators,” he said.

Meanwhile, Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said traditional forecasting models have difficulty keeping up with constantly evolving price pressures from the energy crisis, with inflation drivers reinforcing each other as they emerge.  

“The challenge is this conflict isn’t a one-off shock — it’s persistent and constantly changing shape,” he told BusinessWorld via Viber. “Price pressures now come in waves through energy, food, freight, insurance, FX (foreign exchange), and even wages, and they reinforce each other.”

Since the United States and Israel’s initial attack on Iran on Feb. 28, the global per-barrel oil prices have jumped to over $100 from about $60-$70 earlier this year.

This translated to significantly higher pump prices for the Philippines, which imports over 90% of its oil from the Middle East.

As of end-April, local fuel retailers sold gasoline for about P72.53 to P104.93 per liter, diesel for P75.93 to P101.96 per liter, and kerosene for P125.39 to P147.98 a liter.

PRICE STABILITY AT RISK
Meanwhile, analysts at Singapore-based DBS Bank Ltd. said the Philippines is facing looming price instability, with stagflation risks also rising after growth slowed to a new post-pandemic low of 2.8% in the first quarter.

“Energy supply-driven inflation has already exceeded central bank targets in the Philippines and Vietnam and has reached the upper end in Thailand,” DBS Senior Economist for Eurozone, India, and Indonesia Radhika Rao and Senior Economist for ASEAN Han Teng Chua said in a May 8 note. 

“Price stability could be at risk if upside pressures broaden and trigger second-round effects, reminiscent of the 2022-23 episode,” they added.

This, they noted, should prompt the BSP to stay hawkish with at least 50 basis points (bps) in additional hikes until the third quarter, adding that an off-cycle move is “non-trivial.”

“The Bangko Sentral ng Pilipinas is expected to stay focused on containing inflationary expectations and opt to tighten policy levers,” the DBS economists said. “We expect the BSP to hike rates by at least 50 bps between 2Q-3Q26 (risk of an intermeeting hike is non-trivial).”

Analysts at MUFG Bank Ltd., on the other hand, called for 75 bps in rate increases to bring the policy rate to 5.25%.

“We expect the BSP to hike by another 75 bps in our base case, with the timing likely to be earlier rather than later and bringing the key BSP policy rate to 5.25%,” they said in a separate report.

The central bank’s policy rate now stands at 4.5%, following its first tightening move in over two years at its April 23 meeting.

BSP Governor Eli M. Remolona, Jr. has left the door open for more “modest” hikes as needed to bring inflation back to their 3% target, stressing their commitment to their price stability mandate. 

“For adverse or severe scenarios, inflation could rise to a 7.5% or even as high as 10%, and associated supply shortage would imply a much-decelerated growth, even a recession in (a) severe scenario,” MUFG analysts said. “The extreme inflation would likely make (the) BSP biased toward tightening.”

Faster inflation for imports amid the peso’s recent depreciation against the dollar could also weigh on the economy, especially if the weakness persists, DBS’ Ms. Rao and Mr. Chua also noted.

For MUFG analysts, the local unit could trade between P60.50 to P61.50 per dollar this year, with a likely P62:$1 scenario if domestic and global conditions worsen.

“The Philippines is vulnerable not only because of its high dependence on the Middle East crude oil, but also the weak starting point of growth pre-dating the Iran War,” they noted. “This is in turn driven by fiscal tightening and the flood control projects scandal — reasons unrelated to the Strait of Hormuz — but certainly exacerbated by what’s happening in the Middle East.

The peso plunged to the P61-a-dollar level for the first time last month, even closing at a new historic low of P61.567 versus the greenback on April 29.

On Friday, the local unit fell by 19.3 centavos to close at P60.613 per dollar from its P60.42 finish on Thursday, Bankers Association of the Philippines data showed.