A dovish Bangko Sentral ng Pilipinas (BSP) may be constrained by skyrocketing global oil prices, which would further weaken the peso and could force a pause from further interest rate cuts, foreign banks said.

In a June 23 report, MUFG Global Markets Research said that if world oil prices rise unabated to $90 per barrel, the deficit in the Philippines’ current account, or net dollar earnings, would jump to 4.5 percent of gross domestic product (GDP), putting more depreciation pressures on the peso.

The current account deficit stood at 3.7 percent of GDP at the end of the first quarter, as it is expected by the BSP to settle at 3.9 percent of GDP by end-2025.

“Although the Philippines’ current account deficit sensitivity to oil price increase is not as high as the likes of Thailand and South Korea, the relatively large starting levels... at 3.5 percent of GDP makes the currency more vulnerable due to greater external financing needs,” MUFG explained.

On top of the impact on the current account deficit and the peso, soaring oil prices would also add to inflation in net importer Philippines, MUFG pointed out.

“Asia’s CPI [consumer price index] is likely to rise by 0.1 percentage point (ppt) to 0.8 ppt for every $10-per-barrel oil price increase. Price pressures in Thailand (+0.8 percent), Vietnam (+0.6 percent) and the Philippines (+0.6 percent) are the most sensitive,” it said.

“This could, of course, change if governments decide to raise domestic subsidized fuel prices meaningfully,” it added.

With these factors in consideration, MUFG’s analysis showed that the Philippine peso, South Korean won, and Thai baht are the most vulnerable Asian currencies to sharp oil price spikes.

As Manila Bulletin reported earlier, the peso has been the region’s worst performer since most Asian currencies slid against the United States (US) dollar after Israel attacked Iran two weekends ago. The local currency depreciated versus the greenback by 2.2 percent since June 12.

“Given how FX [foreign exchange] levels in [the Philippine peso and Indian rupee] have already moved weaker, the risks for both currencies could be more two-sided now even as we continue to acknowledge the significant uncertainty in the next steps of the Israel-Iran war,” MUFG said.

“Beyond oil prices, we continue to point to domestic positives such as improving growth prospects and the possibility of a trade deal in India’s case, coupled with the rise in FDI [foreign direct investment] approvals and lower domestic rice prices in the Philippines,” MUFG added.

Moving forward, MUFG thinks that “further increases in oil prices could start to impact the policy space of the Philippines and Vietnam, and to a smaller extent India, from cutting policy rates.”

“As we stand however, the rise in oil prices so far should not prevent Asian central banks from cutting rates further to support growth, even if it could delay the timing,” the Japanese bank said.

Specific to the BSP, which reduced its policy rate by 25 basis points (bps) to 5.25 percent just last week, and Vietnam’s central bank, MUFG said that “the pace of FX depreciation may be a binding constraint to further rate cuts.”

MUFG nonetheless still believes that “both central banks will retain a dovish bias assuming oil prices do not rise sharply from here.”

BSP Governor Eli M. Remolona Jr. last week said that the policy-setting Monetary Board (MB) “sees the need for a more accommodative monetary policy stance,” even as additional rate cuts will all be dependent on the latest economic data in light of mostly global uncertainties.

Deutsche Bank Research economist Junjie Huang, meanwhile, cited in a June 20 report Remolona’s pronouncements that while the peso’s drop would unlikely affect domestic inflation, the central bank would likely intervene in case the currency slides further.

“The Governor had said that the peso hitting a round number could have a 'psychological effect.' In other words, intervention would be to manage the pass-through to imported inflation and inflation expectations, in our view, as inflation remains the priority for the BSP,” Huang said.

As such, Huang is still betting on a 25-bp rate cut during the MB’s Aug. 28 meeting on the monetary policy stance, projecting that “annual inflation is likely to stay near the lower end of the BSP’s two- to four-percent target, barring an escalation in the Middle East conflict.”

“Downside pressures from weaker overall demand and rice supply would likely offset the short-term rise in oil prices,” he said.

But Huang conceded that a volatile peso leading up to the next BSP policy decision in the third quarter “could compel the MB to postpone what we think could be the last cut of this easing cycle.”

“In the most negative scenario, where an escalation of the conflict causes oil prices to rise above $120 per barrel, we believe we could see Asia’s easing cycle end earlier than is expected,” according to Huang.