‘BSP may reconsider interest rate cuts’

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March 4, 2026 | 12:00am

Amid rising tensions in Middle East

MANILA, Philippines — Escalating tensions in the Middle East could complicate the Bangko Sentral ng Pilipinas (BSP)’s easing path this year, as higher oil prices threaten to reignite inflation and narrow policy space for further interest rate cuts.

In a commentary, Bank of the Philippine Islands lead economist Jun Neri warned that a renewed surge in crude prices could materially alter the inflation trajectory and limit the central bank’s room to ease.

“If West Texas Intermediate (WTI) crude oil holds near $80 per barrel through June or monthly rice inflation continues to accelerate, the policy space for further easing could narrow materially, potentially limiting the BSP’s ability to implement further rate reductions this year,” he said.

The renewed geopolitical flare-up follows coordinated airstrikes by the United States and Israel on Iranian targets over the weekend, triggering retaliatory missile attacks across several Gulf states.

At the center of market anxiety is oil supply in the Middle East. Neri said Iran produces approximately 3.3 million barrels per day, making it the fourth-largest producer among the Organization of the Petroleum Exporting Countries.

Beyond its own output, the broader systemic risk lies in the Strait of Hormuz, one of the world’s most critical maritime chokepoints. Roughly 20 percent of global oil supply and around 30 percent of globally traded crude pass through the strait, equivalent to about 20 to 30 million barrels per day.

Even without a full physical disruption, geopolitical risk premiums have already lifted crude prices. WTI crude was up by roughly 17 percent year to date prior to the outbreak of the conflict and was hovering near the $70 level as trading resumed Monday.

Under a moderate escalation scenario, oil prices could climb toward the $75 to $80 range. In a more severe disruption, such as a prolonged blockade of the Strait of Hormuz, prices could surge to $100 to $120 per barrel. Neri said this worst-case outcome is currently assigned roughly a one-third probability.

For the Philippines, the most immediate transmission channel is inflation. Neri said higher energy prices could push headline inflation toward four percent in the coming months, compounding already elevated rice-driven pressures.

“A renewed leg higher in global oil prices would amplify second-round effects through transport, electricity and logistics costs, potentially broadening inflationary pressures beyond food and fuel,” he said.

The BSP has already reduced policy rates by a cumulative 225 basis points since August 2024. Markets have been assessing whether further easing could follow this year should inflation remain manageable. A sustained oil shock could complicate that trajectory.

Neri also flagged potential external vulnerabilities. Nearly 40 percent of overseas Filipino workers are based in the Middle East. But while risks are elevated, he said the overall impact may be contained unless the conflict significantly escalates.

Amid the heightened uncertainty, Neri maintained a depreciation bias on the peso, with a year-end forecast of 59.7 to the dollar, citing the likelihood of safe-haven flows into the greenback and continued volatility in global financial markets.