The Philippine Peso is under significant pressure following a sharp rise in the country's April Consumer Price Index (CPI) inflation, which surged to 7.2% year-on-year, far exceeding the consensus expectation of 5.5% and up from 4.1% in the previous period [1]. According to MUFG’s Michael Wan, this inflation shock highlights the Philippines' heightened vulnerability to Middle East supply disruptions, particularly if the Strait of Hormuz remains closed [1].
In response to the inflation spike, MUFG expects the Bangko Sentral ng Pilipinas (BSP) to hike interest rates further, possibly by another 75-100 basis points this year. There is also a possibility of an off-cycle meeting and a potential jumbo 50 basis point rate hike [1]. However, the central bank faces constraints due to the country's weak growth, which has been partly attributed to fiscal tightening and scandals related to flood control projects [1]. As a result, the BSP is likely to focus on containing inflation expectations rather than aggressively targeting demand destruction, given the current negative output gap [1].
MUFG projects that the USD/PHP exchange rate could rise towards 62.00–63.00 if the Strait of Hormuz remains closed, reflecting continued pressure on the Peso. In a scenario of de-escalation, the USD/PHP could recover gradually towards the 60.50–61.50 range [1]. Overall, MUFG maintains that the Peso remains vulnerable and is expected to underperform across a range of scenarios [1].
CONCLUSION
The Philippine Peso is facing significant downside risks due to a sharp inflation spike and external vulnerabilities. While further BSP rate hikes are expected, their magnitude may be limited by weak economic growth, leaving the Peso exposed to further depreciation if geopolitical risks persist.