BSP seen to turn hawkish amid Middle East crisis
The Bangko Sentral ng Pilipinas (BSP) may be forced into a defensive interest rate hike this year to curb inflation fueled by an oil shock from the Middle East war, Oxford Economics said.
In a note to clients, Callee Davis, senior economist at Oxford Economics, said the research firm’s simulations showed the BSP may tighten monetary policy setting in the third quarter of 2026 should global crude prices rise to $100 per barrel for two months.
Under a more severe scenario, with oil at $140 a barrel over a similar period, the Philippine central bank may be forced to act sooner, potentially in the second quarter, Davis said.
Other emerging-market central banks at risk of turning hawkish include Vietnam, South Africa, Thailand, Czechia, Poland and India.
“Energy importers such as Poland, the Philippines and Egypt have seen the largest upward revisions to their 2026 inflation forecasts since the war began,” Davis said.
The Monetary Board, the top policymaking body of the BSP, does not meet to set rates until next month. But BSP Governor Eli Remolona Jr. already warned that the central bank could reverse course and raise interest rates if global oil prices stay above $100 a barrel for an extended period and the US dollar continues its rally.
Finance Secretary Frederick Go, who represents the Cabinet on the Monetary Board, shared the same view, even floating the possibility of a rate hike at the April 23 meeting “if the price of oil continues to persist at elevated levels.”
In a statement on Wednesday, the BSP said it is closely monitoring the impact of the Middle East conflict on Philippine inflation and the economy ahead of its next policy meeting.
“Price stability is the BSP’s main mandate. As such, the BSP is assessing the potential impact of higher oil price on the price of fertilizer, transport fares, and inflation in general,” the central bank said.
“The BSP is also monitoring effects on the country’s current account—including remittances and trade—and financial markets. On the peso, the BSP stresses that it operates in the foreign exchange market to smooth excess volatility and maintain orderly conditions,” it added.
Violence in the oil-rich region escalated after the United States and Israel had attacked Iran.
Fears of a prolonged war—now in its third week—intensified as Iran curbed traffic at the Strait of Hormuz, a key energy waterway. Iran also continues to attack its Persian Gulf neighbors hosting American troops.
Before the upheaval, domestic inflation had already risen to a 13-month high of 2.4 percent in February, though it remained within the BSP’s 2 percent to 4 percent target band. That subdued inflation environment allowed the BSP to cut its key policy rate to 4.25 percent, more than a three-year low, to support a sluggish economy reeling from the fallout of a massive corruption scandal.
Looking ahead, Oxford Economics’ Davis said that even in the more severe scenario, emerging market growth “remains relatively resilient,” falling only to 3.9 percent.
On the fiscal side, Go allayed concerns that the Philippines would need to raise debt levels to fund additional spending in response to the energy shock.
Instead, Go said the government is prioritizing fiscal discipline. He expressed confidence that the P1.6-trillion budget deficit target—equivalent to 5.3 percent of gross domestic product—remains achievable despite rising risks.
“We are also trying to see where the government can save on the expenditure side. The President has called on government offices to delay unnecessary programs and save on expenditures. They called for a reduction in energy costs at government offices,” Go said in an interview with Bloomberg.
“If we are able to achieve that, then there will be no need to increase debt levels,” he added.
The main spending concern is the possible revenue shortfall if excise taxes on fuel are suspended starting May, which could reduce collections by P136 million. But Go said this would be “balanced” by value-added tax on fuel imports.
This year, the government plans to borrow P2.68 trillion, with P2.05 trillion sourced domestically and P627.1 billion from external creditors, maintaining a 77:23 domestic-to-foreign borrowing mix. The program is expected to push the country’s total debt stock past P19 trillion by the end of 2026.
However, the borrowing plan faces headwinds. The Bureau of the Treasury has been rejecting offers in recent Treasury bill and bond auctions as investors demand higher yields. As such, the government fell short of its borrowing target in the past two weeks.
