Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. reiterated in his Open Letter to the President that the central bank is ready to tweak the benchmark rate to ensure price stability and achieve its mandate of a low and stable inflation environment.

“We stand ready to adjust monetary policy settings as necessary to mitigate second round effects and better anchor inflation expectations, as we continue to prioritize safeguarding price stability in line with our primary mandate,” Remolona told President Ferdinand R. Marcos Jr., in his first Open Letter to the President on Jan. 23. He was appointed last July as BSP's seventh governor for the next six years.

The BSP governor publishes an Open Letter to Malacanang yearly as a way of public disclosure and to explain to Filipinos the hows and whys of inflation targeting, its outlook and BSP’s response to managing high inflation for the last two years.

Based on the Open Letter, Remolona assured Marcos that both monetary and non-monetary measures contribute to bringing down high inflation, which as of end 2023 stood at an average of six percent, still way above the government target range of two percent to four percent.

“Given the significant upside risks to food and transport prices—including from the continued constraints on international food trade—we wish to highlight the crucial role of non-monetary measures in helping to bring inflation back to a target-consistent path. In particular, Executive Order No. 50, which extended the effectivity of reduced tariff rates on key agricultural commodities, could temper risks to food prices,” said Remolona.

He noted other supply-side measures “will be equally important, including strategies to mitigate the potential impact of El Niño in communities, as well as efforts to boost the productivity of the agriculture sector.”

As for the outlook for inflation and monetary policy, the BSP chief reiterated the central bank’s hawkish actions in 2023. After raising the target reverse repurchase (RRP) rate by a combined 350 basis points (bps) in 2022, the Monetary Board again increased the policy rate by 100 bps in 2023 to bring the key rate to 6.5 percent.

This is because upside risks to prices have continued to dominate the inflation outlook.

“In raising the policy interest rate, the BSP sought to prevent sustained price pressures from becoming entrenched and causing inflation expectations to drift further away from the Government target range, thereby causing further second-round effects on wages, transportation fares, and other production costs,” said Remolona.

He further explained that as “both headline and core inflation decelerated, the BSP saw scope to pause its monetary policy tightening in the second half of the year.”

“However, as prices of certain food items and inflation expectations increased again, the BSP responded with a prompt off-cycle increase in the policy interest rate in October 2023 to ensure that inflation expectations remained firmly anchored,” he added.

After the off-cycle policy action last Oct. 26, 2023, the BSP has kept a steady policy stance. The BSP chief said the pause in the tightening bias allow the BSP to “further observe and assess how firms and households continue to respond to tighter monetary policy conditions, as lagged effects of prior policy interest rate adjustments are expected to manifest fully in 2024.”

In the Open Letter, Remolona also said that it forecasts the baseline inflation to settle within target in 2024 and 2025.

“Inflation is likely to settle within target in Q1 (first quarter) 2024 due to negative base effects but could temporarily accelerate above the target in Q2 2024 due to the potential impact of El Niño weather conditions, second-round effects of supply shocks, and positive base effects. Subsequently, inflation is projected to return to target in Q3 2024 and settle near the midpoint in Q4 2024, aided by the decline in global oil prices,” he said.

However, the BSP chief continued to emphasize the balance of risks to the inflation outlook for this year and 2025.

The upside risks include: higher transport charges; increased electricity rates; higher oil and domestic food prices due to continued constraints on food supply; and the additional impact of a strong El Niño episode persisting until the second quarter 2024 on domestic and imported food prices as well as power rates.

“Meanwhile, the impact of a weaker-than-expected global recovery and successful implementation of government measures to mitigate the impact of El Niño weather conditions are the primary downside risks to the outlook. Should these risks materialize, the BSP’s risk-adjusted forecasts indicate that inflation could settle above target at 4.2 percent in 2024 before reverting towards the target band at 3.4 percent in 2025,” said Remolona.