Nomura: PH inflation seen falling faster on lower oil prices

MANILA, Philippines – The Philippines is poised to be one of Asia’s biggest beneficiaries from the tentative peace deal between the United States and Iran, with lower oil prices expected to accelerate the country’s inflation slowdown, according to Nomura Global Markets Research.

In a research note, Nomura estimated that every 10-percent decline in oil prices could reduce Philippine inflation by about 0.5 percentage point. This is the largest disinflationary impact in the region and on par with India.

READ: US, Iran reach deal to end war, reopen Hormuz

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Nomura currently forecasts Philippine inflation to average 5.5 percent this year. In May, inflation had already eased to 6.8 percent from 7.2 percent in April, although it remains above the Bangko Sentral ng Pilipinas’ (BSP) 2-percent to 4-percent target range.

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This brought the year-to-date average to 4.5 percent.

The investment bank also estimated that a 10-percent drop in oil prices could improve the Philippines’ current account balance by about 0.37 percentage point of gross domestic product, as lower energy costs reduce the country’s import bill.

“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,” Nomura said.

“Nevertheless, the US-Iran peace deal offers a welcome reprieve for Asia, with the potential for stronger growth, lower inflation and reduced twin current account and fiscal pressures,” it added.

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Nomura’s outlook follows a sharp decline in global crude prices after the United States and Iran reached a tentative peace agreement that could lead to the reopening of the Strait of Hormuz, a key global energy shipping route.

The deal, which is expected to be formalized in Switzerland on Friday, is seen to end more than three months of war in the Middle East. Following the announcement, Brent crude prices fell roughly 25 percent from a month ago to below $83 per barrel.

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But despite the expected decline in headline inflation, Nomura maintained its view that the BSP’s rate-hiking cycle remains intact as underlying price pressures remain elevated.

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

Nomura said the central bank is also likely mindful of the risks posed by El Niño, particularly on food prices.

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“However, if headline inflation falls more materially in the near term due to the drop in oil prices, and core inflation peaks much earlier than our baseline of Q4, we acknowledge the risk that BSP could hike by a lower 50bp instead of another 75bp,” it added. INQ