MUFG’s Michael Wan highlights that the Philippines faces heightened vulnerability to Middle East supply disruptions, with April Consumer Price Index (CPI) surging to 7.2% year-on-year, far above expectations. He expects Bangko Sentral ng Pilipinas (BSP) to hike rates further but sees limits given weak growth. MUFG projects USD/PHP could move towards 62.00–63.00 if the Strait of Hormuz stays closed, and 60.50–61.50 on de-escalation.

Philippines inflation spike pressures Peso

"The Philippines as we have been highlighting falls into that vulnerable camp. The data released on the Philippines’ April CPI inflation is indicative and an example of that impact, with headline inflation rising dramatically to 7.2%yoy, well above consensus expectation of 5.5%yoy, and from 4.1%yoy previously."

"Overall, we think BSP will likely have to hike rates further possibly by another 75-100bps this year given the inflation print, and we will not be surprised if there is an off-cycle meeting to do so coupled with perhaps some chance of a jumbo 50bps rate hike moving forward."

"Nonetheless, given the relatively weak starting point of growth in the Philippines in part driven by the fiscal tightening with the flood control projects scandals, we think that BSP’s focus is more on containing inflation expectations, rather than to target demand destruction given the current negative output gap."

"As such, we think there will be a limit to the overall magnitude of BSP rate hikes moving forward, with the central bank certainly caught between a rock and a hard place."

"We continue to think that PHP remains vulnerable and should underperform across a range of scenarios, and see USD/PHP possibly rising closer to 62.00 to 63.00 if the Strait of Hormuz remains closed. In our base case of de-escalation, we think USD/PHP could recover gradually towards the 60.50 to 61.50 range."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)