The central bank forecasts inflation to drop below the two percent to four percent target band in the first three months of 2024 on receding “confluence of unusual shocks”, according to the new Bangko Sentral ng Pilipinas (BSP) chief.
“What’s going to happen, we think, is that we will overshoot on the low side by the first quarter of 2024 and then settle within the target range for the rest of the year,” said Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona during the Philippine Economic Briefing (PEB) in Toronto, Canada last July 13.
As of the latest Monetary Board inflation forecasts, the BSP expects inflation will hit 5.4 percent for 2023 and 2.9 percent for 2024. The consumer price index (CPI) will still be above-the-target this year but will return to the target range next year.
“We’ve had inflation as high as 8.7 percent in 2023 (January) and the last number is 5.4 percent (June). Our models tells us that we will be within the target range of 2-4 percent by Q4 this year,” said Remolona.
He said the BSP CPI target is not an arbitrary range. “That’s the range that based on our analysis, is ideal for an economy like the Philippines growing at full capacity. So, while we’re not at the forefront of pushing for growth, we’re laying the environment for the growth that is being planned,” he said.
Remolona agreed with the rest of the administration’s economic team that the economy will easily grow by 6.5 percent to eight percent this year.
For the part of the BSP, which is mandated to ensure price and financial stability, the new BSP chief said they have a secret weapon in its inflation targetting framework first adopted in 2002.
“We adhere to a flexible inflation targeting framework. That means we focus largely on price stability unlike Fed (US Federal Reserve) which focuses on both inflation and employment. In other words, we’re structurally hawkish when it comes to inflation and that helped us,” he told foreign investors.
Before going to Canada for the PEB, Remolona said a policy rate cut is possible once inflation is below four percent which the BSP forecasts will be in October this year.
With a lower June inflation of 5.4 percent, the CPI average year-to-date is now 7.2 percent. This was on point to the BSP’s forecast that inflation will be in the 7.2 percent level in the first half of 2023 before declining to 4.6 percent by the third quarter and three percent by the fourth quarter.
The central bank 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.
From a peak of 8.7 percent in January, inflation has steadily declined to 8.6 percent in February, 7.6 percent in March, 6.6 percent in April, 6.1 percent in May and 5.4 percent in June.
As for an extended pause, Remolona said previously that the Monetary Board will study all relevant data one policy meeting at a time.
The Monetary Board has kept the 6.25 percent benchmark rate unchanged for the past two policy meetings in a row. The BSP has raised the key rate by a cumulative 425 basis points. The next policy meeting is Aug. 17.