The Bangko Sentral ng Pilipinas (BSP) expects the country’s inflation rate will remain above-target “in the coming months” due to supply shocks but still confident it will fall within the two percent to four percent target range in the last quarter of the year.

The BSP on Tuesday, Sept. 5, after the release of a higher 5.3 percent August consumer price index (CPI) by the Philippine Statistics Authority versus 4.7 percent in July, commented that upside risks persist which was why they announced earlier that August inflation could have peaked as high as 5.6 percent. Its forecast range was a low of 4.8 percent to a high of 5.6 percent for the month of August.

The BSP said higher oil prices as well as some select and key agricultural commodities raised the CPI in August.

“Inflation is likewise expected to remain elevated in the coming months due to continued impact of supply shocks on food prices and the rise in global oil prices. Nonetheless, inflation is still projected to decelerate back to within the inflation target by Q4 2023,” it said in a statement.

It added that the “balance of risks to the inflation outlook continues to lean towards the upside owing to the potential impact of additional transport fare increases, higher-than-expected minimum wage adjustments in other regions, persistent supply constraints for key food items, El Niño weather conditions, and possible knock-on effects of higher toll rates on prices of key agricultural items.”

The BSP reiterated that the primary downside risk to the inflation outlook is still the impact of a weaker-than-expected global economic recovery.

As a forward guidance, meaning BSP’s hints of the direction of monetary policy, it also reiterated that it is always prepared to adjust the monetary policy stance as necessary.

This is to “prevent the further broadening of price pressures as well as the emergence of additional second order effects in view of the persistent upside risks to the inflation outlook.”

“The BSP also continues to support the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation,” it added.

The next policy rate meeting of the BSP’s Monetary Board is on Nov. 16.

To contain rising inflation and ease the exchange rate volatility, the BSP has raised the benchmark rate by a cumulative 425 basis points from May 2022 until March 2023. For the past three policy meetings in a row, the BSP has maintained a hold position and kept the interest rate unchanged at 6.25 percent.

With August’s CPI of 5.3 percent, the year-to-date inflation average is still above-target at 6.6 percent. This is the first time since February this year that inflation has increased, capping a six-month decelerating trend.

As of its Aug. 17 Monetary Board policy meeting, the BSP forecasts CPI of 5.6 percent for this year while the projection for 2024 is 3.3 percent and 3.4 percent for 2025 -- both are within the target band.

Based on the BSP’s latest Monetary Policy Report, it expects inflation to drop to an average 3.4 percent in the last quarter of the year.

By the first quarter of 2024, the BSP expects 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 by the third quarter next year, at 3.7 percent.

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.

The BSP also said that the estimated negative base effects until January 2024 will be favorable for the inflation path.

Meanwhile, upside risks to the inflation outlook include 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.

The BSP said inflation expectations for 2023 has remained steady while factors indicate further easing of inflation for 2024 and 2025.

For this year, inflation rate peaked at 8.7 percent in January before declining to 8.6 percent in February, 7.6 percent in March, 6.6 percent in April, 6.1 percent in May, 5.4 percent in June and 4.7 percent in July.

Meanwhile, BSP Governor Eli M. Remolona has said that he remains confident of BSP’s inflation-targeting monetary policy which is centered around achieving a “low and stable” inflation to support economic growth.

“Inflation targeting is appropriate for the Philippines because we are an emerging market,” he said previously.

The BSP first adopted the inflation-targeting framework in early 2002.

For 2023 until 2025, the inflation target range is two percent to four percent. Remolona said this target range is suitable 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-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. “We think we’ll hit 6%,” he has said.

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 the CPI, 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 began on Feb. 28, 2022 -- impacted on both global and local prices. As inflation remained elevated, the BSP tightened its monetary policy to reanchor inflation expectations.

The BSP has kept its hawkish stance while inflation is still above the government target range.