Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said the government’s non-monetary measures such as reducing import tariff on pork may pull the inflation forecast lower to below four percent this year.

Last week, the Monetary Board raised the average inflation forecast for 2021 to 4.2 percent from its previous estimate (February) of four percent, thereby breaching the two-four percent target.

Diokno said proper timing and implementation of these non-monetary measures can actually result in lower full-year inflation.

“The 4.2 percent average inflation forecast for this year is based on the assumption that nothing will be done,” he said in a business forum Friday. “So, it’s a ‘Do Nothing’ scenario.”

The BSP continues to support various non-monetary interventions of the National Government that will ease the impact of supply-side factors on inflation.

Diokno said the Duterte administration will “do something” including cutting the tariff on imported pork, as well as a “lot of administrative work.” The government is increasing pork imports to address the shortage and therefore ease rising prices, among other things.

“We expect inflation -- if these things are done at the right time and it gains traction – (to still) be within the inflation range of two-four percent,” said Diokno.

The BSP chief reiterated that despite raising the inflation forecast to 4.2 percent, they still expect inflation to remain within target this year and in 2022.

“Although this year, because of the slight increase in the first two months of the year, we expect the average inflation for 2021 to be maybe slightly above or upper bound of the target which is two-four percent, but very quickly next year it will be back to 2.8 percent average for the year,” said Diokno.

Inflation has been elevated but Diokno stressed that this is transitory in nature, based on their assessment. “We expect inflation will be back to (within target range) by the second half of the year. (And) since this is supply-side factors, we do not need any monetary tightening at this point.”

On March 25, the BSP’s Monetary Board did not move the policy rate, keeping it at two percent for the overnight reverse repurchase facility. The last rate cut of 25 basis points was on November 19. The overnight deposit and lending facilities also remained at 1.5 percent and 2.5 percent, respectively.

Diokno said the monetary policy settings continue to be appropriate to support the economic recovery this year. The inflation average forecast for 2022 was also raised to 2.8 percent from 2.7 percent previous estimate.

The transitory trajectory of rising inflation mainly reflects the impact of weather-related disturbance on the supply of key food items, as well as higher global oil prices.

“Demand-side pressures remain largely subdued, with core inflation showing relative stability,” noted Diokno.

Upside risk factors that may threaten the inflation target are spilled-over effects on the demand side such as a hike in wage and transport fare which will warrant a monetary policy response.

For now, the current inflation forecasts are based on supply-side price pressures from oil and meat prices, and the impact of an earlier rollout of COVID-19 vaccines on domestic economic activity.

The downside risks to inflation, in the meantime, are the potential cut in tariffs of pork imports and the potential impact on global and domestic economic growth prospects due to potential delays in mass vaccination and the spread of new variants of the virus, said Diokno. He also said risks to the inflation outlook continue to be broadly balanced for 2021 but could tilt toward the downside for 2022.