The option to tighten monetary policy and counter the economic effects of the Middle East crisis is dependent on incoming data and potential spillover effects, Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said.

In a recent interview, Remolona explained that any monetary policy response to the oil price shock hinges on whether spillover effects materialize in domestic demand, where the BSP’s policy tools are most effective.

Weaken demand

“So for inflation, we usually weaken demand, which is what we do. We weaken demand by tightening monetary policy,” he said.

“That would not have a lot of effect in the face of a supply shock. So we’re waiting for spillover effects on demand. When those effects appear, then we can do something with monetary policy,” Remolona added.

The conflict’s escalation in March led to the closure of the Strait of Hormuz, a global chokepoint that handles about 20 percent of the world’s oil supply. Located partly within Iran, the Strait’s closure drove global oil prices sharply higher. Domestically, this pushed pump prices and transport costs upward, contributing to the acceleration of March inflation to 4.1 percent — up 1.7 percentage points from the previous month.

The second-round effects cited by Remolona refer to broader price increases beyond oil products. Rising fuel costs often force businesses to raise the prices of goods and services, further lifting headline inflation.

Higher prices, in turn, can alter consumer behavior, while workers may demand higher wages to cope with declining purchasing power.

March inflation highlights upside risks

In a statement released Thursday, the BSP said the elevated March inflation rate highlights upside risks that could spill over to other components of the Consumer Price Index (CPI), which is used to compute inflation.

Prolonged high oil prices tend to ripple across nearly all components of the CPI basket, as fuel is a key input to both production and transportation — factors the BSP and the Philippine Statistics Authority identified as primary drivers of March’s inflation acceleration.

Remolona noted that while spillover effects from supply shocks typically take two to three months to feed into demand, the current energy shock may produce faster transmission. “[G]iven how sharp the rise in oil prices has been, it may be quicker than that. So this is kind of a new experience,” he said.

The BSP’s main policy tools operate by either stimulating or restraining demand in response to economic pressures. Last month, the central bank’s Monetary Board decided to keep interest rates unchanged, citing the limited effectiveness of rate hikes in addressing inflation driven by supply-side shocks linked to the Middle East conflict.

Inflation driven by supply shocks

“This inflation is driven by supply shocks, where the potency of monetary policy is limited,” Remolona said previously. “So we can do something with the downside risks to growth, but not to this kind of inflation.”

The BSP has lowered its key policy rate twice since December 2025 in response to weak economic growth, partly linked to the flood control infrastructure scandal.

Meanwhile, several international institutions — including the Asian Development Bank, World Bank, and S&P Global — have downgraded their economic outlooks for the Philippines, citing the potential impact of second-round effects that have yet to fully materialize despite the recent two-week ceasefire.