Iran deal impact on PHL inflation to be more direct due to oil-cost pass through

THE INFLATION impact of the Iran peace deal on the Philippines will be more direct because fuel is unsubsidized and sold to consumers on a pass-through cost basis, Nomura Global Markets Research said.

It said the Philippines could also experience easing pressure on its current account as the cost of importing fuel falls, Nomura Global said.

In a report dated June 15, the Japanese banking group’s research arm said headline inflation could fall by as much as 0.5 percentage point for every 10% decline in oil 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,” Nomura Global said. 

Inflation started to cool down in May following several pump price rollbacks last month.

It slowed to 6.8% from the over three-year high of 7.2% in April, defying market expectations and even the central bank’s 7.1%-7.9% forecast for the month.

However, as Nomura Global research analysts Euben Paracuelles and Nabila Amani noted in the report, high oil costs are still feeding into consumer prices with core inflation picking up in May.   

“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,” they said. “That said, headline inflation remains well above BSP’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 Bangko Sentral ng Pilipinas’ (BSP) target for the first time since December 2023 at 4.1% last month from 3.9% in April. 

In a separate note, DBS Group Research senior economists Han Teng Chua and Radhika Rao said the resolution of the Iran crisis brought relief to hard-hit countries in Southeast Asia.

“We therefore expect regional inflation to cool gradually in the coming months following the war- and supply-driven price spike,” they said.

US and Iranian officials confirmed on Sunday that they agreed to end the fighting, with the deal set to be signed on Friday in Switzerland.

The agreement will lift the US naval blockade on Iran and effectively reopen the Strait of Hormuz.

Meanwhile, Mr. Chua and Ms. Rhao said the expected lag in the peace deal’s impact still gives the BSP ample room to deliver measured interest rate hikes.

“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,” they said.

“While both Bank Indonesia and Bangko Sentral ng Pilipinas 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 (basis points) to provide additional support to their respective currencies as well as contain inflationary expectations,” they added. 

A BusinessWorld poll conducted last week 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.

Nomura Global’s Mr. Paracuelles and Ms. Amani noted that aggressive tightening may now be off the table, with room for at most one 25-bp hike at each of the BSP’s next three policy reviews.

“This supports our view that BSP’s hiking cycle remains intact but it is keeping a measured approach, as the drop in headline CPI (consumer price index) inflation precludes the need for a more aggressive monetary tightening,” they said.

Deutsche Bank Research said the BSP can afford to deliver a larger 50-bp hike on Thursday to stay ahead of the curve as the recent inflation slowdown might only be temporary.

“We think a more decisive move now from the BSP would reduce the risk that it has to do more later,” it said in a report on Tuesday.

“May’s lower inflation print of 6.8% vs. April’s 7.2% would, on the surface, seem to imply that inflation is cooling, but our analysis of underlying inflation does not suggest the same. Rather, this respite may only be temporary and broad price pressures are still building up in the economy,” it added.

Based on the BSP’s latest projections, inflation will likely remain above its 2%-4% target at an average 6.3% this year and 4.3% next year. — Katherine K. Chan