Bangko Sentral ng Pilipinas (BSP) Expects Elevated Inflation to Return to Target Range by Year End
The Bangko Sentral ng Pilipinas (BSP) remains optimistic that inflation will return to the government’s target range of two percent to four percent by November or December this year, unless unexpected supply shocks occur.
Following the announcement of a 6.1 percent increase in consumer price index (CPI) for September, higher than August’s 5.3 percent, the BSP released a statement on Thursday, Oct. 5, stating that they had anticipated this outcome due to the increased prices of key agricultural products in September. However, the latest CPI figure falls within the BSP’s forecast range of 5.3 percent to 6.1 percent for the month.
The BSP attributed the rise in inflation to higher prices of oil and key agricultural commodities in September. They also projected that inflation would remain elevated in the coming months due to the continued impact of supply shocks on food prices and the global rise in oil prices. However, they still expect inflation to decrease and return to the target range by the end of 2023, barring any further supply shocks.
BSP officials emphasized that the risks to the inflation outlook are significantly skewed towards the upside for the next two years or until 2025. These upside risks include potential transport fare adjustments, higher domestic prices of essential food items due to supply constraints, and higher-than-expected minimum wage adjustments outside the National Capital Region. The impact of El Niño weather conditions on food prices and utility rates, as well as higher electricity rates, are also considered as upside risks to inflation.
On the other hand, a weaker-than-expected global recovery that affects the country’s growth trajectory remains a downside risk to inflation.
To address the elevated inflation, BSP Governor Eli M. Remolona Jr. has already signaled that there will be at least two policy rate hikes before the end of the year. The next Monetary Board policy meetings are scheduled for Nov. 16 and Dec. 14. The current key rate, the target reverse repurchase rate, stands at 6.25 percent.
Economists surveyed by the BSP in August maintained an inflation projection of 5.5 percent for 2023, but expect it to ease in the near term due to negative base effects. The projection of 5.5 percent CPI is lower than the BSP’s forecast of 5.8 percent for this year.
Based on the latest Private Sector Economists’ Inflation Forecasts, the mean forecast for 2024 is 3.5 percent, down from 3.6 percent in the previous survey in July. For 2025, the mean forecast is 3.4 percent, also a decrease from the previous 3.6 percent forecast.
Despite the upside risks to inflation, analysts predict that inflation will continue to decline in the coming months, primarily due to negative base effects. The survey conducted by the BSP noted that the inflation outlook still carries risks tilted to the upside, mainly due to supply disruptions such as the potential adverse impact of El Niño.
To address rising inflation and ease exchange rate volatility, the BSP has already raised the benchmark rate by a cumulative 425 basis points (bps) from May 2022 to March 2023. In the past three policy meetings, the BSP has maintained the interest rate at 6.25 percent.
