Oil Shock Scenarios And Inflation Path
With oil prices above US$100/bbl, inflation is expected to stay above 4% in both 2026 and likely 2027. The analysis links this to the risk of more persistent inflation and higher inflation expectations. It also draws a distinction between a temporary supply shock and a longer-lasting shift that may require a policy response. A rate rise is not assumed in the near term, but the risk increases if inflation persistence grows while economic growth weakens. The base case for two rate cuts this year is now under serious threat. With Brent crude trading stubbornly around US$95 per barrel this morning and the latest Philippine Statistics Authority report showing February inflation ticked up to 4.1%, the conditions for easing are quickly evaporating. The market is beginning to price out the probability of the June and October cuts we were expecting. This is no longer a distant risk, as the geopolitical crisis in the Strait of Hormuz has not been resolved by the March deadline we had hoped for. This persistence suggests the oil price shock may not be as temporary as the COVID-era supply disruptions were, raising the chance that higher inflation expectations become embedded. Traders should be wary of holding positions that are heavily reliant on lower interest rates in the second half of the year.Trading Implications For Rates And Fx
In the derivatives market, this means unwinding receive-fixed positions in Philippine interest rate swaps, as the prospect of rate cuts fades. We see value in paying fixed rates on shorter-term swaps, positioning for the BSP to remain on hold for longer than previously anticipated. The odds are shifting from a rate-cutting cycle to a prolonged pause. We remember from the 2022 inflation shock, which pushed prices up over 8% in the Philippines, that the BSP is not afraid to hike aggressively to defend its mandate, even at the cost of growth. That historical precedent suggests the central bank’s pain threshold for inflation is lower than for economic weakness. Sustained oil prices above US$100 would make a rate hike, not a cut, a real possibility for late 2026. For currency traders, this changes the outlook for the Philippine Peso. A more hawkish BSP would provide a supportive floor for the currency, countering some of the negative sentiment from higher oil import costs. We should consider buying call options on the PHP or selling out-of-the-money call options on USD/PHP to position for a stronger-than-expected peso. The primary focus for the coming weeks should be on adjusting portfolios away from the rate cut narrative. The risk is now skewed towards the BSP maintaining its current policy rate of 4.25%, or even being forced to tighten if oil prices escalate further. Using options to hedge against a surprise hike later in the year would be a prudent strategy. Create your live VT Markets account and start trading now.
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