The Bangko Sentral ng Pilipinas (BSP) remains confident of its inflation-targeting monetary policy and ensures the public that it is on track achieving a “low and stable” inflation to support economic growth.

“Inflation targeting is appropriate for the Philippines because we are an emerging market,” according to BSP Governor Eli M. Remolona.

The primary objective of the BSP's monetary policy is price stability that will be supportive of growth. Therefore, inflation targeting is centered around achieving a low and stable inflation at all times.

“I believe that’s the right framework for us,” the BSP chief added.

The BSP first adopted the inflation-targeting framework in early 2002. As explained by the central bank, “this approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period.” For 2023 until 2025, the targets an inflation range of two percent to four percent.

Remolona said the two percent to four percent inflation target is the right range that is suitable and encouraging for an economy that is the size of the Philippines. The current inflation target will ensure the economy will grow as intended, or six percent to seven percent in 2023.

For this year, however, with a BSP inflation forecast of 5.6 percent which is still way above the target, the BSP chief said it is not likely the economy as measured by gross domestic product (GDP) will grow to seven percent which is the high end of the 2023 GDP target.

“The target is 6-7%. We think we’ll hit the 6%,” Remolona said last week. He also said that while six percent is doable, he doubts seven percent can be achieved at this point.

The country’s GDP growth in the second quarter was a disappointing 4.3 percent, lower than the first quarter’s 6.4 percent. For the first six months, the economy grew by 5.3 percent, below the government target of six percent to seven percent.

As for inflation, the latest number is 4.7 percent in July while year-to-date is 6.8 percent, significantly above-target.

The BSP in its latest inflation outlook report said “economic headwinds along with the impact of the cumulative monetary policy adjustments” will moderate GDP growth and it will likely fall below the government target of six percent to seven percent for 2023 and 6.5 percent to eight percent for 2024 and 2025. These GDP targets was first announced on June 9 by the inter-agency Development Budget Coordinating Committee.

The country’s inflation is largely a supply-shock driven inflation. It started rising above the target in April last year as the Ukraine war --which started on Feb. 28, 2022 -- impacted on both global and local prices. As inflation remained elevated, the BSP tightened its monetary policy by a cumulative 425 basis points to reanchor inflation expectations.

The BSP has various tools to manage inflation. These tools are monetary policy instruments. The reverse repurchase or the borrowing rate is the primary monetary policy instrument of the BSP, while other tools are open market operations, term deposits, the BSP securities facility, and other liquidity management facilities.

Using all its arsenal, the BSP said the consumer price index (CPI), currently at 4.7 percent in July, will fall to 3.4 percent by the fourth quarter of this year.

The BSP also said that by the first quarter of 2024, the inflation rate will be around 2.4 percent but will “accelerate near the upper end of the target range” in the next two quarters, or the second and third quarters.

The expectation is that by the second quarter of 2024, CPI will average at 3.6 percent and about 3.7 percent by the third quarter next year.

The factors behind the forecast levels are positive base effects, higher crude oil prices, and the lagged impact of minimum wage adjustments, before settling slightly above the midpoint of the target in 2025, said the BSP.

Meanwhile, upside risks to inflation remains, such as more transport fare hikes and minimum wage adjustments, as well as higher prices of key food items and the impact of El Niño weather conditions on food and electricity prices which could lead to renewed second-round effects.