Inflation Still Casts Shadow Over PHL Economy Amid Lingering Energy Instability, Metrobank Says

INFLATIONARY PRESSURES continue to pose risks to the Philippines as a prolonged oil shock ripples through transportation, electricity, food, and fertilizer costs, Metropolitan Bank and Trust Co. (Metrobank) said. “The Philippines remains vulnerable to prolonged energy disruptions through several channels,” Metrobank Markets Research Head Anna Dominique Cudia said in a report. “Together, higher transportation, electricity, and agricultural costs can contribute to broader inflationary pressures, particularly in food and household costs,” she added. Headline inflation has been above the central bank’s target since March, following the commencement of hostilities in the Persian Gulf in late February. In June, headline inflation eased to 6.4% from 6.8% in May as an interim peace deal between the US and Iran brought oil prices down from its over $100-per-barrel peak during the height of the fighting. This brought inflation to an average of 4.8% in the first half. On the other hand, core inflation, which excludes volatile food and fuel prices, rose for a sixth straight month in June to a 31-month high of 4.4%. The Philippines’ reliance on oil imports makes it highly vulnerable to price fluctuations in the global oil market, Ms. Cudia noted. “Sustained increases in global energy costs typically translate into higher pump prices and transportation expenses,” she added. Ms. Cudia said high fuel prices also lead to costlier electricity rates and fertilizer prices, with the latter bringing additional pressure on food prices. “These challenges may be compounded by weather-related risks and competition from imported products,” she said. In July, the Manila Electric Co. hiked electricity rates for a second consecutive month to P14.8261 per kilowatt-hour from P14.4833 a month earlier. “The latest escalation (in the Persian Gulf) serves as a reminder that the conflict remains unresolved. While oil prices will continue to attract attention, the more important story may be the gradual erosion of supply and inventory buffers,” Ms. Cudia said. “For the Philippines, the consequences could eventually manifest as higher fuel and electricity costs, more expensive agricultural inputs, firmer inflation, and shifting market expectations,” she added. The Metrobank analyst also noted that the energy shocks risks fueling expectations of higher interest rates and bond yields, as well as tightening consumer spending amid heating inflation. Since the Middle East war broke out, the Bangko Sentral ng Pilipinas has raised its key interest rate by 50 basis points to 4.75%. Markets continue to price in further tightening as the central bank remained hawkish, cautioning against strong inflationary pressures. — Katherine K. Chan