The Bangko Sentral ng Pilipinas (BSP) has left its target reverse repurchase (RRP) rate or the policy rate unchanged for the second meeting in a row amid a broadly similar inflation outlook in the last two months, according to BSP Governor Eli M. Remolona Jr.

The Monetary Board, BSP’s policy-making arm, has decided to have an ending benchmark overnight rate of 6.5 percent for 2023 during its last policy meeting for the year on Thursday, Dec. 14.

“With the sum of recent information, the Monetary Board continues to see the need to keep monetary policy settings sufficiently tight to allow inflation expectations to settle more firmly within the target range,” said Remolona in a press briefing.

He said “previous adjustments” including an off-cycle rate hike of 25 basis points (bps) last Oct. 26 have worked their way through the economy “as can be seen from the declining path for core inflation.” Since May 2022, the BSP has raised the key rate by 450 bps.

“In the coming quarters, the National Government’s non-monetary interventions will remain crucial to sustain the disinflation process,” he said, adding that “BSP remains ready to adjust monetary policy settings as necessary, in line with its mandate to ensure price stability.”

On Thursday, the BSP revised its risk-adjusted full-year inflation forecast to six percent for 2023 from the Nov. 16 projection of 6.1 percent. For 2024, the risk-adjusted forecast was also lower at 4.2 percent from 4.4 percent previously. The BSP retained the 3.4 percent risk-adjusted inflation forecast for 2025.

BSP Senior Assistant Governor Illuminada T. Sicat said that for the baseline inflation projection, the 2023 forecast is six percent; 3.7 percent for 2024; and 3.2 percent for 2025.

The 2023 and 2024 baseline forecasts are the same as Nov. 16’s six percent and 3.7 percent. However the 2025 baseline projection is lower from the previous 3.4 percent.

The difference between the two forecasts is that the risk-adjusted inflation is equivalent to the baseline inflation forecast plus the probability weighted impact of the different upside and downside risks to the inflation outlook.

Remolona said he prefers the risk-adjusted inflation forecasts because these numbers take into consideration events or factors that are expected to happen at some point in time. Meanwhile, baseline estimates are based on events that has already transpired.

Remolona said Thursday that the overall outlook for inflation remains largely unchanged. He noted the lower risk-adjusted inflation forecast for 2024 and an unchanged outlook for 2025.

“Equally important, the BSP’s latest survey of external forecasters shows that inflation expectations have been broadly anchored, with a mean forecast that is within range for both 2024 and 2025,” he added.

Sicat, for her part, said the latest private economists’ forecasts showed lower mean inflation outlook for 2023 at six percent, lower than 6.1 percent in the November survey.

For 2024, inflation expectation also declined to 3.9 percent from four percent. For 2025, there was a slight increase from 3.4 percent to 3.5 percent, she said.

The BSP officials, including BSP Director Dennis D. Lapid, explained during the press briefing that the balance of risks to the inflation outlook is still “significantly toward the upside.”

Key upside risks or potential pressures are expected to come the following: higher transport charges; increased electricity rates; and higher oil prices.

What could reduce the price pressures are the “impact of a relatively weak global recovery as well as government measures to mitigate the effects of El Niño weather conditions could reduce the central forecast.”

Meanwhile, Remolona said the medium-term growth prospects remain on solid footing amid strong demand in the fourth quarter, primarily due to “sustained consumer spending and improved labor market conditions.”

“The BSP will also continue to monitor how firms and households are responding to tighter monetary policy conditions alongside evolving domestic and external economic conditions,” he said.

With the target RRP rate unchanged at 6.5 percent, the Monetary Board also kept the interest rates on the overnight deposit and lending facilities untouched at six percent and seven percent, respectively.

In November, the headline inflation dropped to 4.1 percent year-on-year from 4.9 percent in October. It was within the BSP’s forecast range of four percent to 4.8 percent for the month.

The average inflation now stands at 6.2 percent as of end-November, still way above the government target range of two percent to four percent.

Core inflation, which excludes selected volatile food and energy items and denotes underlying demand-side price pressures, also declined to 4.7 percent year-on-year in November from 5.3 percent in October.

The latest inflation number remains consistent with central bank projections that inflation will likely moderate over the near term due to easing supply-side price pressures and negative base effects.

The BSP said it will have to closely monitor inflation expectations and second-round effects and take appropriate action as needed to bring inflation back to the target by 2024.