Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said the Monetary Board will increase the key rates in the first two meetings next year as inflation is expected to peak around 8.5 percent in December, before tapering off in January.

Medalla told reporters Tuesday, Dec. 20, that two 25 basis points (bps) rate increase can be “in the card in the next two meetings” in 2023. This will bring the BSP rate to six percent in the first quarter next year.

Meantime, the planned reduction in banks’ reserve requirement ratio (RRR) which has been postponed to next year, will likely be implemented within the first six months of 2023 especially if the projected lower inflation will happen.

“To avoid confusing the market, (the RRR cut) has to wait when we’re no longer in an increasing mode,” said Medalla. He added that if the inflation path is clearly decelerating to the target range of two percent to four percent, the BSP can reduce the RRR before June 2023. “Cutting (RRR) within the first semester of next year is still a possibility,” he said.

Medalla said that after the first quarter, the central bank may decide either another rate hike after the first two meetings, or opt for a pause, as these actions are very much data dependent.

Going by previous dates, it is usual for the Monetary Board to hold its first policy meeting in February and the second one in March.

Medalla reiterated his previous comments that the range and pace of the next policy rate hikes will not be as aggressive as in recent months.

He could not say what the BSP terminal rate will be, but said it is “safe to say that it will be higher” than the current key rate of 5.5 percent.

The most recent rate hike was a 50 basis points (bps) rate hike on Dec. 15. The BSP has raised the key rate by a cumulative 350 bps since May 19.

“We’re already at the point where the balance can go one way or the other. But I certainly will not predict that there will be no more (rate hikes),” said Medalla.

In terms of the size of the rate increases, the BSP chief said they also had to consider the rate of increase in the US policy rate which will get smaller.

“At the same time our rate is already quite high relative to our forecast. If we believe that the inflation rate in July-August (2023) will be closer to three than to four percent, then actually a six percent policy rate is already quite high, because the policy rate has to be interpreted in relation to the expected inflation,” he explained.

The BSP expects inflation rate will peak in December, possibly around 8.5 percent or lower compared to November’s actual eight percent, before tapering off in January.

“I’m almost sure the peak is in December, not January (2023), because the base effects are working in favor of January,” said Medalla.

He said he will give it a “50 percent chance” that the December inflation could hit a high of 8.5 percent or lower. “You can never rule it out,” he said, using a standard error forecast of plus or minus 0.4 percent.

For example, if the starting point is November’s eight percent, if the December rate comes out at 8.3 percent, that is a correct forecast. A plus or minus 0.4 percent is range of 7.6 percent to 8.4 percent.

The BSP had thought previously that inflation will peak in October but typhoons derailed this inflation path.

As for the exchange rate -- with the peso seem stabilizing at the P55-56 level and with the US dollar no longer as strong -- is no longer a worry factor in as far as inflation is concerned.

Inflation, which hit eight percent in November, currently has a year-to-date average of 5.6 percent. The BSP forecasts an average inflation of 5.8 percent for 2022, 4.5 percent in 2023 and 2.8 percent in 2024.

The BSP has said that inflation will slow down in the next months after peaking in December due to several factors including negative base effects.

The easing global oil and non-oil prices, negative base effects, and the impact of BSP’s 350 basis points (bps) cumulative policy rate adjustments will ensure inflation path will decelerate in 2023 until 2024.

It expects inflation path to return to within the target band of two percent to four percent by the third quarter next year and will approach the lower end of the range by the mid-2024.

The BSP said the risks to the inflation outlook continue to be on the upside for 2023 but remains broadly balanced for 2024.

The key upside risks are the potential impact on international food prices of higher fertilizer prices, trade restrictions and adverse global weather conditions. The higher food prices such as sugar and meat due to bad weather and supply disruptions are also upside risks, including pending petitions for transport fare hikes.