The Bangko Sentral ng Pilipinas (BSP) is more confident inflation will drop to below four percent as early as October this year after the consumer price index (CPI) declined in May, the fourth straight month in a row.

The government on Tuesday, June 6, announced that May inflation eased to 6.1 percent versus 6.6 percent in April. It is also within the BSP’s forecast range of 5.8 percent to 6.6 percent for the period.

“(Inflation remains) consistent with the overall assessment that (CPI) will remain elevated over the near term before gradually decelerating back to target range in Q4 (fourth quarter) 2023 in the absence of further supply-shocks,” the BSP commented following the government’s latest CPI announcement.

For the first five months of the year, the average inflation is still high at 7.5 percent, way above the two percent to four percent BSP target.

The BSP said the balance of risks to the 2023 and 2024 inflation outlook continue to be tilted to the upside due to these factors: persistent constraints in the supply of key food items; the potential impact of El Niño on food prices and utility rates; and the effects of possible additional adjustments in transportation fares and wages.

The downside risks is the impact of a weaker-than-expected global economic recovery due to elevated inflation, recession worries and lingering financial stability issues.

During the Monetary Board’s most recent policy meeting on May 18, the BSP decided for a “prudent” pause after raising the policy rate by a cumulative 425 basis points (bps) in nine straight rate hikes. The BSP rate or the overnight reverse repurchase rate currently stands at 6.25 percent.

The BSP took a break from its year-long tightening stance because inflation has been on a decelerating path since February this year after peaking at 8.7 percent in January. The exchange rate has also stabilized somewhat between P55 to P56 against the US dollar.

With the pause, the BSP has some time to review markets’ conditions after the aggressive rate hikes, especially asset prices. The interest rates on the overnight deposit and lending facilities were also left unchanged at 5.75 percent and 6.75 percent, respectively.

BSP Governor Felipe M. Medalla said they could maintain a hold stance for two to three more Monetary Board policy meetings before taking further action. The implication is the pause will last until August or September this year.

The BSP in its latest Monetary Policy Report, however, said it is ready to resume interest rate action “as necessitated by the potential upside risks in the near term, in keeping with the BSP’s primary mandate to ensure price stability.”

The next BSP policy meeting is on June 22. The BSP said Tuesday that it “stands ready to adjust the monetary policy stance as necessary to prevent the further broadening of price pressures as well as the emergence of additional second order effects.”

It also called on the government for its continued support “for the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation.”

As of May 18, the BSP forecasts 2023 average inflation of 5.5 percent and 2.8 percent for 2024.

The BSP expects inflation will average at 7.2 percent in the first half of this year, 4.6 percent by the third quarter and three percent by the fourth quarter.

The central also thinks inflation will be firmly within the target range by the first quarter of 2024 due to negative base effects and expected decline in oil and non-oil prices.