BSP may delay rate cut due to rising oil prices

The upsurge in oil prices arising from the recent drone attacks on Saudi Arabia’s oil fields is seen to temper the ability of the Bangko Sentral ng Pilipinas (BSP) to release more liquidity in the financial system.

Emilio Neri Jr., economist at Ayala-led Bank of the Philippine Islands, said that with the recent attacks reducing oil supply in the global market and putting upward pressure on oil prices, inflation in oil-importing Philippines might start climbing faster than expected in November and December of this year through 2020.

“Based on past experience, faster inflation could slow manufacturing and can be a damper on household consumption as we experienced recently in 2018, so that even if national government spending catches up in second half 2019, GDP (gross domestic product) growth may not accelerate as the government and most analysts expect,” Neri said in an email.

A higher import bill resulting from higher oil prices is also seen to put pressure on the peso exchange rate against the dollar.

“The 53:$1 level appears reachable as imports tend to peak in September through November,” Neri said.

With higher inflation and a peso-weakening bias, the economist said the BSP might not be able to cut either the overnight borrowing rate (reserve repurchase agreement or RRP) or the reserve requirement ratio as much as the markets had originally anticipated.

“The local government securities market will likely feel the effects the most as participants seem to be pricing in a full dial back of the BSP’s RRP rate to 3 percent from today’s 4.25 percent,” Neri said.

In a separate research note, ING said one of the most pressing issues from the Saudi Aramco facilities attack was how quickly Saudi production facilities could resume production.

ING noted that Saudi oil inventories were probably less than 26 days’ worth of Saudi oil exports and extra supply from the Organization of Petroleum Exporting Countries—estimated at 800,000 to 900,000 barrels a day—-would not be sufficient to compensate for the more than five million barrels a day Saudi outage.

“A prolonged outage would therefore likely see Brent crude trading well over $70 and perhaps closer to $80 if the outage extended over three to four weeks,” ING said.

ING expects investors to view a prolonged increase in oil price as a threat to US Federal Reserve’s monetary easing. “Indeed, this would make the risk of a less dovish tone at this week’s Fed meeting more prevalent, resulting in higher rates in the US compared to other currency zones and in a flattening of the US dollar curve,” the research said.