The ongoing conflict between Israel and Iran has sparked concerns regarding its impact on global oil prices, which may influence the monetary policy decisions of the Bangko Sentral ng Pilipinas (BSP).

Economists from various foreign banks indicate that while the BSP is likely to proceed with a reduction in key interest rates this month, the geopolitical tensions may cause a reevaluation of further cuts in subsequent meetings.

Deutsche Bank Research forecasts that the BSP's Monetary Board will implement a 25 basis point (bps) reduction in its interest rate during the upcoming meeting on June 19, lowering the rate to 5.25 percent from 5.5 percent.

This anticipated decision is primarily supported by a decline in headline inflation, which has fallen to a 5.5-year low of 1.3 percent year-on-year in May 2023, averaging 1.9 percent over the first five months of the year.

This rate is below the BSP’s target range of two to four percent, which is considered conducive for economic growth.

Junjie Huang, an economist at Deutsche Bank, has noted that while the current geopolitical developments should not hinder the upcoming rate cut, they may influence the August meeting's decision.

Huang posits that both supply and demand pressures may contribute to a sustained low inflation environment in the near term.

Conversely, MUFG Bank Ltd. has raised alarms about the inflationary potential stemming from the conflict between Israel and Iran.

Rising Brent crude oil prices have been recorded, reaching as high as $78 per barrel amid ongoing hostilities.

MUFG’s Global Markets Research indicates that this situation places additional depreciation pressure on oil-importing currencies, including the Philippine peso, which recently fell to ₱56 per $1.

In this context, the weight on currencies such as the Indian rupee, Philippine peso, and South Korean won has been observed as markets reacted to the escalating situation.

As oil prices increase, net oil importing countries face the risk of ballooning trade deficits, which can further weaken their currencies.

The analysts at MUFG express concern that the ongoing tension may deter consecutive interest rate cuts across multiple Asian central banks, including those in India and the Philippines.

Singapore-based DBS Bank Ltd. maintains a stance that suggests the BSP will lower its key borrowing cost by 50 bps during the third quarter, beginning with the expected cut on June 19. The forecast is underpinned by the slowest inflation rate in nearly six years and a significant real rate buffer, although mixed economic indicators and global uncertainties are noted as factors that may influence future decisions.

Overall, the geopolitical landscape has introduced complexities into the BSP’s strategic considerations for monetary policy, forcing a reevaluation of interest rate trajectory amidst fluctuating global oil prices and local inflationary expectations.