Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona cautioned the market against being too tolerant amid a decelerating inflation path because upside risks to inflation still remain.

"It is too soon to declare victory. Core inflation remains high. There are still upside risks to inflation,” he told bankers during the BSP 30th Anniversary event before the weekend.

"We will wait and see. We will analyse the data as they arrive and that analysis will decide monetary policy down the road,” said Remolona last Friday, July 28.

The next Monetary Board policy meeting is on Aug. 17.

As of its last Monetary Board policy meeting on June 22, the BSP has an average inflation forecast for 2023 of 5.4 percent, lower than its May 18 projection of 5.5 percent. For next year, the BSP is projecting a consumer price index (CPI) of 2.9 percent from a 2.8 percent estimate previously.

The BSP has raised the key rate by a combined 425 basis points to ensure CPI will go back to within the target range of two percent to four percent by 2024. Under the BSP’s inflation targeting framework for monetary policy, the target is defined in terms of the average year-on-year change in the CPI over the calendar year.

The BSP has a current “hold” position in monetary policy setting. The benchmark rate is still 6.25 percent for the last two policy meetings in a row. A pause in the monetary tightening cycle will give BSP time to review markets’ conditions after the aggressive rate hikes, especially asset prices.

While Remolona did not grant press interviews on Friday during the BSP event and had no comment about the recent hike in US interest rates, he did say last July 17 that the BSP is more likely to hike policy rates than reducing it with inflation still elevated with dominant upside risks, as well as a peso that could depreciate any time.

The US Federal Reserve raised its own rates last week which was not what Remolona expected. He anticipated the US Fed will decide to pause because the last US inflation number was “very good”.

A US rate hike will have an impact on the exchange rate. If it is a "sharp" movement, Remolona said they would have to respond "in some way." When asked previously what a sharp movement for the peso is for him, the BSP chief said this will depend on the market narrative that caused the movement to begin with.

Meanwhile, the latest headline inflation number which was the June CPI further slowed to 5.4 percent from 6.1 percent in May but still above the government target of two percent to four percent. This is the fifth time the inflation rate is on a downward path since it rose to 8.7 percent in January this year.

Remolona last Friday said inflation may have already peaked at 8.7 percent and on its way back to the target range by the end of 2023.

With a lower June inflation, 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.

Core inflation, which does not include some volatile food and energy items, also slowed in June to 7.4 percent versus 7.7 percent in May. The other difference between headline and core CPI is that the latter could capture the underlying demand-side price pressures, according to the BSP.

Remolona said the sustained drop in CPI is in line with BSP’s assessment that inflation will return to the target range by the fourth quarter this year in the absence of further supply shocks.

However, he also cautioned against evolving conditions in view of persistent upside risks to the inflation outlook.

The central bank continues to assess that there are more upside risks to inflation outlook than downside risks.

The upside risks include the potential impact of additional transport fare increases and minimum wage adjustments, persistent supply constraints of key food items, El Niño weather conditions, and possible knock-on effects of higher toll rates on prices of key agricultural items.

Downside risk is primarily the impact of a weaker-than-expected global economic recovery.