The Bangko Sentral ng Pilipinas (BSP) is still confident that by November or December this year, elevated inflation will return to the two percent to four percent government target barring any unexpected supply shocks.
In a statement on Thursday, Oct. 5, after the announcement of the 6.1 percent consumer price index (CPI) for September which is higher than August’s 5.3 percent, the BSP said they had expected this outturn because of the higher prices of key agricultural products in September. The latest CPI is within BSP’s forecast range for the month of 5.3 percent to 6.1 percent.
“Higher prices for oil and key agricultural commodities drove inflation during the month. Inflation is likewise expected to remain elevated in the coming months due to continued impact of supply shocks on food prices and the rise in global oil prices. Nonetheless, inflation is still projected to decelerate back to within the inflation target by end-2023 in the absence of further supply shocks,” the BSP said.
BSP officials also reiterated that risks to the inflation outlook continued to be “skewed significantly to the upside” for the next two years or until 2025.
These upside risks include the potential impact of new petitions for transport fare adjustments, higher domestic prices of key food items amid persistent supply constraints, and the higher-than-expected minimum wage adjustment in areas outside of the National Capital Region.
The impact of El Niño weather conditions on food prices and utility rates is another upside risk as well as the higher electricity rates.
As for downside risks to inflation, this remains to be the impact of a weaker-than-expected global recovery which has also affected the country’s growth trajectory.
“The BSP stands ready to resume monetary policy tightening as necessary to prevent the renewed broadening of price pressures as well as the emergence of additional second order effects in view of the persistent upside risks to the inflation outlook,” said the BSP.
Since inflation is still elevated, BSP Governor Eli M. Remolona Jr. has already signaled that there will be at least two policy rate hikes before the year ends. The next Monetary Board policy meeting is on Nov. 16 and Dec. 14.
The target reverse repurchase rate or the key rate is currently on hold at 6.25 percent. Remolona has also said that an off-cycle rate hike is possible, given the increase in CPI in August and September.
Economists polled by the BSP in August has maintained an inflation projection of 5.5 percent for 2023 but will ease in the near term due to negative base effects. The 5.5 percent CPI expectation is lower compared to the BSP’s 5.8 percent forecast for this year.
Based on the latest Private Sector Economists’ Inflation Forecasts, the mean forecast for 2024 is lower at 3.5 percent from 3.6 percent in the July survey, while for 2025, it is 3.4 percent, down from the previous 3.6 percent as well.
Despite upside risks to the inflation outlook, analysts project inflation will continue to decline in the coming months largely because of negative base effects. The survey noted that risks to the inflation outlook remain tilted to the upside due mainly to supply disruptions, particularly the potential adverse impact of El Niño,” according to the survey.
To contain rising inflation and ease the exchange rate volatility, the BSP has raised the benchmark rate by a cumulative 425 bps from May 2022 until March 2023. For the past three policy meetings in a row, the BSP has kept the interest rate unchanged at 6.25 percent.