UNCERTAINTY over oil prices fuels inflation expectations and the monetary policy response more than actual price movements, according to a study by De La Salle University’s Angelo King Institute for Economics and Business Studies (AKI).
“Compared with shocks to Brent crude prices, oil price uncertainty shocks generate larger and more persistent responses of the monetary policy rate and account for a greater share of fluctuations in household inflation expectations, inflation, and monetary policy,” AKI researcher Aris Zoleta said in a paper.
Mr. Zoleta noted that global oil price movements, particularly those based on Brent crude, often stoke actual inflation and household expectations.
However, his study found that shocks driven by oil price uncertainty bear more weight on the Bangko Sentral ng Pilipinas’ (BSP) monetary policy.
“Although both oil price uncertainty shocks and Brent crude oil price shocks generate similar qualitative responses of output growth, inflation expectations, and headline inflation, oil price uncertainty shocks consistently exert larger and more persistent effects on monetary policy,” Mr. Zoleta said.
“The consistency of these findings across three complementary empirical approaches strengthens the conclusion that uncertainty surrounding future oil prices contain substantially more information for macroeconomic dynamics than realized oil price movements alone,” he added.
In April, the BSP reversed its easing cycle after energy shocks from the Middle East fighting fueled inflation faster than they had anticipated.
It has since extended its tightening path, with BSP Governor Eli M. Remolona, Jr. noting that volatile global oil prices are among the inflationary pressures they are seeking to contain.
On Thursday, the BSP tightened policy for a fourth straight meeting by 50 basis points (bps) to 5.5%, bringing its total increases since it began tightening to 125 bps.
“Following an oil price uncertainty shock, the policy rate increases substantially more than after a Brent crude oil price shock and remains elevated over a considerably longer horizon,” Mr. Zoleta said.
“This result suggests that the BSP responds more strongly to uncertainty surrounding future oil prices than to realized oil price increases alone,” he added.
According to Mr. Zoleta, this could be because a sustained monetary policy response is more warranted when major oil price uncertainty reinforces stubborn inflation and risks feeding into inflation expectations.
Philippine inflation has been red-hot since the Middle East war erupted, with global oil prices swinging between $70 and around $110 per barrel in the past eight months.
Inflation accelerated to 7.2% in September, matching this year’s peak from April, after the cost of oil, food, and utilities surged again.
This brought the nine-month average to 5.4%, well above the BSP’s 3% target.
As of the last week of October, pump price adjustments stood at a net increase of P68.85 per liter for gasoline, P64.43 per liter for diesel, and P62.76 per liter for kerosene. — Katherine K. Chan