Weakening peso

Our economy is navigating a severe supply-side shock due to the Hormuz crisis. But the fear that our supply of diesel and gasoline will dry up has receded as fresh shipments negotiated by the government have arrived. Indeed, the problem now is lack of storage capacity.

But the damage to our economy from Trump’s Iran adventure is now palpable. The Bangko Sentral ng Pilipinas (BSP) has instinctively adopted a hawkish stance to combat inflation and peso depreciation driven by oil prices exceeding $100 per barrel.

The BSP raised its key interest rate by 25 basis points to 4.5 percent on April 23, 2026. They justified the rate increase as necessary to combat “second-round effects” of inflation. That’s when higher energy or food costs become embedded in the economy.

Indeed, the failure of US-Iran peace talks to free up Hormuz caused the cost of oil to breach $120 per barrel last week. The crisis is far from over.

The BSP projects April 2026 inflation to be within the range of 5.6 to 6.4 percent, well above the two to four percent target for 2026-2027. That’s because our petroleum requirements are sourced almost 98 percent from the wrong side of the Hormuz Strait, causing a surge in fuel costs and hemorrhaging the peso.

Not everyone is convinced the BSP’s hawkish stance is right. Some economists commented that a rate hike wouldn’t solve a supply-driven shock. A central bank cannot “print” more oil or fix a naval blockade by raising interest rates.

When inflation is supply-driven and the product demand is inelastic (people must buy gasoline to get to work), raising rates feels like kicking the economy while it’s down.

Calixto Chikiamco, president of the Foundation for Economic Freedom said: “Our BSP increases interest rates to look tough on inflation but supply shock is the cause of inflation. There’s already “demand destruction” going on with high oil prices. So why is the BSP adding to the demand stress?”

Demand destruction. When oil prices rise, that’s effectively an extra tax on households and businesses. That means less money is spent on other things.

Fear of what comes next makes people lose confidence so they start spending less. Or in the case of our masa, they run out of money to spend even on essentials.

For MSMEs, a decline in consumer spending, combined with more expensive diesel to move their products, squeezes business margins. Eventually businesses start cost-cutting and laying off workers.

But the BSP is very terrified of rising inflation expectations, supply or demand driven. They are afraid that once this “inflationary mindset” sets in, it stays even after the crisis ends.

The BSP is really attempting to stop the peso from collapsing without using up our international reserves.

The chain reaction is pretty obvious. With high oil prices, the Philippines needs more U.S. dollars to pay for those imports. This creates massive demand for USD and sells off the peso.

If the peso depreciates too much (e.g., hitting P62 or P63), all Philippine imports (food, medicine, machinery) become more expensive. By raising rates, the BSP hopes to stabilize the exchange rate and prevent a second wave of “imported” inflation.

But this BSP strategy also risks stagflation (stagnant growth + high inflation).

If the BSP hikes the interest rate too aggressively while the economy is struggling with energy costs, businesses can no longer afford to pay their loans and can’t afford to pay their power bills. They default and then close.

Still, the BSP is betting that a hopefully temporary recession caused by high interest rates is less damaging than hyper-inflation caused by a currency death spiral.

What happens if the Strait of Hormuz remains blocked for the next six months?

Simple, the Philippines enters a period of high economic vulnerability characterized by a “stagflationary” environment of higher inflation and weaker growth.

In a prolonged six-month blockade scenario, some forecasts suggest growth could even fall below four percent. The petroleum supply chain can dry up as strategic oil inventories outside Hormuz are used up.

If the blockade persists, experts project two more hikes within the year to defend the currency. The peso is expected to trade between P60.00 and P61.00 against the dollar while oil stays at $100 per barrel.

With national oil reserves only estimated to last 50 days, a six-month blockade would necessitate strict state-mandated fuel rationing. Energy-intensive sectors like manufacturing, transportation and travel will likely see disruptions similar to the pandemic lockdowns. Higher fertilizer costs will also drive-up food prices.

Is the weak peso bad for us? Well, the economy was already struggling before Hormuz. The weak peso may be an opportunity for the economy to reform and grow.

A currency weakness is not a threat, according to Dr. Victor Abola, a senior economist at the University of Asia and the Pacific. He thinks a depreciated peso is one of the more reliable tools the Philippines has for generating jobs and reviving its long-stagnant export sector.

“We should not fear currency depreciation. A depreciated currency actually produces higher GDP growth and more employment,” Abola asserts.

Dr. Jose Ramon Albert of PIDS commented that “A weaker peso can help become a jobs engine for exporters, tourism and some tradable sectors…

“But peso depreciation is not automatically a jobs miracle. It may help some industries expand employment, but it also raises the cost of fuel, food inputs, machinery, transport and many basic goods that Filipinos rely on.”

Chikiamco, however, observed that overvaluation of the peso is at the root of our large trade deficit of $50 billion. China, Vietnam, Japan, Taiwan with large manufacturing, are all export-oriented. They have all “manipulated their currencies, with Vietnam depreciating its currency as much as 40 percent through the years.”

Are we making the right moves to deal with this crisis? Hopefully we are. But the old textbook and knee jerk moves may no longer suffice. Fresh thinking is required of BBM and the BSP.

Boo Chanco’s email address is . Follow him on X @boochanco