Uncertainty over oil prices does more to fuel Philippine inflation expectations and shape the monetary policy response 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 the paper.

Mr. Zoleta noted that global oil price movements, particularly those based on Brent crude — the international benchmark for crude oil — often stoke both actual inflation and household expectations. His study, however, found that shocks driven by oil price uncertainty carry more weight in the Bangko Sentral ng Pilipinas' (BSP) monetary policy decisions.

"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," he 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," Mr. Zoleta added.

The findings come amid an active tightening cycle. In April, the BSP reversed its easing stance after energy shocks from the Middle East fighting drove inflation higher than policymakers 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 the central bank is seeking to contain.

On Thursday, the BSP tightened policy for a fourth straight meeting, raising rates by 50 basis points (bps) to 5.5% and bringing its total increases since tightening began to 125 bps (1.25 percentage points).

"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."

According to Mr. Zoleta, this could be because a sustained monetary policy response is more warranted when heightened oil price uncertainty reinforces stubborn inflation and risks feeding into inflation expectations.

Philippine inflation has run hot since the Middle East war erupted, with global oil prices swinging between $70 and around $110 per barrel over the past eight months. Headline inflation accelerated to 7.2% in September, matching this year's peak from April, after the cost of oil, food, and utilities surged again. That lifted the nine-month average to 5.4%, well above the BSP's 3% target.

As of the last week of October, cumulative 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. Against that backdrop, the study points to the variable worth watching in the months ahead: not just where oil prices settle, but how much uncertainty surrounds their path — the factor the research found carries the most weight in BSP decisions.

The report was originally published by BusinessWorld: Oil price uncertainty bigger influence than actual increases on BSP policy, inflation, study finds. — Katherine K. Chan