High oil prices to weaken peso

High global oil prices are expected to further weaken the peso, which already touched nearly 12-year lows last week, London-based Capital Economics said.

“Higher oil prices will put upward pressure on energy inflation” as Brent crude now costs $80 a barrel from $45 last year, Capital Economics senior Asia economist Gareth Leather and Asia economist Krystal Tan said in a May 25 report titled “What does the latest spike in oil prices mean for Asia?”

“On average, this would add around 0.4 percentage point to headline inflation in Asian economies. However, any increase will prove short-lived. Even if oil prices remain high, energy inflation will drop back sharply in the second half of the year,” Capital Economics said.

But while a temporary rise in inflation of this magnitude was unlikely to be too much of a concern for policymakers given that inflation in most countries was currently so low, Capital Economics said that “the two exceptions are the Philippines and India, where inflation is already above target.”

As of April, headline inflation already averaged 4.1 percent, beyond the government’s full-year target range of 2-4 percent.

“The recent rise in oil prices makes it even more likely that [the Philippines and India] will raise interest rates over the coming months,” Capital Economics added.

This month, the Bangko Sentral ng Pilipinas increased its policy rate by 25 basis point to 3.25 percent—the first since September 2014, mainly due to high inflation at the start of the year.

Capital Economics also sees elevated oil prices to “lead to an increase in external vulnerabilities in some countries,” specifically on their trade balances and current account.