Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla is still projecting below two percent inflation by 2024 due to base effects or the deviating change on a year-on-year basis in the price index.

“It could be below two percent for a few months. This is due to base effects,” Medalla told Manila Bulletin. “For instance, inflation last January was very high. So, the January 2024 price index may be less than two percent higher than the January 2023 price index,” he said.

As of its last Monetary Board policy meeting on March 23, the BSP forecasts average inflation of six percent for 2023 and 2.9 percent for 2024. As of end-March, inflation averaged at a high of 8.3 percent, way above the government’s two percent to four percent target.

However Medalla, who is an economist and former dean of the UP School of Economics, is maintaining a below two percent inflation forecast by mid-year 2024 already based on their latest forecasting models, instead of early or within the first quarter next year which was what he said in January.

After seeing February’s turnout of 8.6 percent and March’s much-improved 7.6 percent rate, Medalla is more confident that recent policy adjustments will result in a gradual easing of price pressures.

While headline inflation eased to 7.6 percent year-on-year in March, the core inflation which does not include volatile food and energy items continued to increased to eight percent from 7.8 percent in February.

Still, the BSP said that the latest inflation number remains consistent with its assessment that inflation will remain elevated in the near term but gradually revert towards the target range in end-2023, or as early as October.

On a quarterly basis, the central bank forecasts inflation will average at 7.7 percent in the first six months of this year. By the third quarter, it should be at 5.4 percent and lower in the last quarter of the year at 3.8 percent.

Inflation started rising above the two percent to four percent target in April last year as the Ukraine war which started on Feb. 28, 2022, impacted on both global and local oil and non-oil commodity prices.

As inflation remained elevated, the BSP tightened its policy rates by a cumulative 425 basis points (bps) since May last year to reanchor inflation expectations. To date, the policy rate stands at 6.25 percent.

When BSP again raised the key rate by 25 bps on March 23, Medalla said further policy tightening will “preserve the buffer against external spillovers amid heightened uncertainty and volatility emanating from financial sector distress in advanced economies.”

In addition, the risks to the inflation outlook continue to be on the upside for 2023 and 2024.

Medalla has noted that domestic supply shortages, higher transport fares, increasing electricity rates, as well as above-average wage adjustments this year are affecting price pressures in a much broader base.

Meanwhile on the downside, he said the impact of a weaker-than-expected global economic recovery could curb inflation.