Philippines oil price uncertainty drives stronger BSP response than actual crude gains, study finds

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Philippines oil price uncertainty study

Highlights

AKI's study finds oil price uncertainty, rather than actual Brent crude movements, drives a larger and longer-lasting policy rate response from BSP.
BSP raised its policy rate by 50 basis points to 5.5% on Thursday, totaling 125 basis points in cumulative hikes during the current tightening cycle.
Philippine inflation hit 7.2% in September and April, with a nine-month average of 5.4% as global oil fluctuated between $70 and $110 per barrel.

Study links oil volatility to stronger rate response

As reported by BusinessWorld, citing De La Salle University’s Angelo King Institute for Economics and Business Studies, oil price uncertainty is generating larger and more persistent effects on inflation expectations and monetary policy than actual Brent crude price movements. In a paper, AKI researcher Aris Zoleta said uncertainty shocks account for a greater share of fluctuations in household inflation expectations, inflation and the policy rate.

Zoleta said both oil price uncertainty shocks and Brent crude price shocks produce similar qualitative effects on output growth, inflation expectations and headline inflation. However, he said uncertainty surrounding future oil prices consistently has a bigger and longer-lasting influence on the central bank’s policy response.

He added that the result holds across three complementary empirical approaches, reinforcing the view that uncertainty over future oil prices contains more information for macroeconomic dynamics than realized price movements alone. Zoleta said the policy rate rises substantially more after an oil price uncertainty shock and stays elevated for a longer period than after a direct Brent crude price shock.

Inflation pressures keep BSP on tightening path

That conclusion aligns with the BSP’s recent policy actions as energy shocks feed into broader price pressures. In April, the central bank reversed its easing cycle after inflation accelerated faster than expected amid Middle East fighting, and it has since extended its tightening path.

BSP Governor Eli M. Remolona, Jr. has said volatile global oil prices are among the inflationary pressures the central bank is trying to contain. On Thursday, the BSP raised its policy rate by 50 basis points for a fourth straight meeting to 5.5%, bringing cumulative increases in the current tightening cycle to 125 basis points.

Philippine inflation has remained elevated since the Middle East war erupted, with global oil prices swinging between $70 and around $110 per barrel over the past eight months. Inflation accelerated to 7.2% in September, matching the year's peak in April, lifting the nine-month average to 5.4%, well above the BSP’s 3% target.

As of the last week of October, pump price adjustments show a net increase of P68.85 per liter for gasoline, P64.43 per liter for diesel and P62.76 per liter for kerosene. Zoleta said a sustained monetary policy response may be more justified when oil price uncertainty reinforces stubborn inflation and risks feeding further into inflation expectations.

In our earlier article on conflict-driven surges in oil shipping costs, we explained how attacks and rerouting risks pushed tanker rates to record levels, making freight a much larger share of the delivered crude price. We also noted that these higher transport and insurance costs can quickly pass through to pump prices and broader consumer inflation, hitting import-dependent markets particularly hard.

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