The Bangko Sentral ng Pilipinas (BSP) said Friday, Jan. 5, that the latest consumer price index (CPI) of 3.9 percent for the month of December 2023 is within its forecast range and remains consistent with its 2024 outlook of a decelerating inflation.
In a statement after the government CPI December announcement, the BSP immediately noted that the latest inflation is within its forecast range of 3.6 percent to 4.4 percent, as well as on point to its full-year CPI forecast of six percent.
BSP revised its risk-adjusted full-year inflation forecast to six percent for 2023 last Dec. 14 versus its Nov. 16 projection of 6.1 percent. For 2024, the risk-adjusted forecast is currently at 4.2 percent and 3.4 percent for 2025.
As for the baseline CPI forecasts, for 2023, 2024 and 2025, these are six percent, 3.7 percent and 3.4 percent, respectively.
The difference between the two forecasts is that the risk-adjusted inflation is equivalent to the baseline inflation forecast plus the probability weighted impact of the different upside and downside risks to the inflation outlook.
BSP Governor Eli M. Remolona Jr. has said that he prefers the risk-adjusted inflation forecasts because these numbers take into consideration events or factors that are expected to happen at some point in time. Meanwhile, baseline estimates are based on events that has already transpired.
With the December 2023 inflation of 3.9 percent, this brings the full-year average inflation to six percent.
“The latest inflation outturn is consistent with the BSP’s projections that inflation will likely moderate in the near term due to easing supply-side price pressures and negative base effects,” said the BSP on Friday.
It added that “nonetheless, the balance of risks to the inflation outlook continues to lean significantly toward the upside” and that “key upside risks are associated with potential pressures from higher transport charges, increased electricity rates, higher oil prices, and higher food prices due to strong El Niño conditions.”
Meanwhile, the BSP continues to note that the impact of a relatively weak global recovery as well as government measures to mitigate the effects of El Niño could reduce the central forecast.
To date, the BSP policy rate or its overnight target reverse repurchase (RRP) rate is 6.5 percent. Remolona has signaled consistently to the market that the inflation-targeting BSP is hawkish, which means it will remain tight for longer and will only consider reducing the RRP rate when they see a convincing low and stable inflation of between two percent and two percent.
As it is, the CPI has been above-target for 20 months. This is the first time – with the December number – that inflation fell below four percent
“The Monetary Board deems it necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes evident. The BSP will continue to monitor inflation expectations and second-round effects and take appropriate action as needed to bring inflation back to the target, in keeping with the BSP’s price stability mandate,” said the BSP before the weekend.
Last week, Remolona said the BSP is “within striking distance” of the target CPI and that “in the next month or so” it could stay within the target range due to base effects.
He is also hoping that once inflation settles within the target range, that it will hold and not rise anymore beyond four percent.
As far as the BSP is concerned, supply-side price pressures as well as negative base effects have been accounted for so far, and factored in their risk-adjusted inflation forecasts for 2023, 2024 and 2025.
However upside risks still persists such as higher transport fares, higher electricity and oil prices, and a higher-than-expected minimum wage adjustments in the National Capital Region. The effects of El Niño weather conditions also continue to be a potential supply-side pressure to inflation.
Remolona said the BSP expects inflation will settle within the target in the first quarter of this year but will temporarily exceed four percent again in April to July due to base effects and El Nino’s impact to prices of food and electricity.
Meanwhile, the BSP has decided to keep the two percent to four target band until 2026. The BSP will normally announce a three-year target for inflation.
The central bank said the government’s decision to retain the medium-term inflation target “underpins the BSP’s resolute commitment to take all necessary action to bring inflation to a target-consistent path over the medium term.”
It added that it “will remain vigilant and data-dependent in deciding on monetary policy in order to steer inflation to a target-consistent path, fostering price and financial stability in the country.”
The three-year medium-term inflation target is consistent with BSP’s “forward-looking approach to monetary policy formulation to keep inflation expectations anchored to the inflation target.”
As an inflation-targeting central bank, the BSP is committed to keep a “low and stable” inflation which refers to the rate of change in the average prices of goods and services typically purchased by consumers.
The Philippine Statistics Authority calculates and announces the monthly CPI and the rate of inflation based on a nationwide monthly survey of prices for a given basket of commodities.
The primary mandate of the BSP is to maintain price stability, which in essence “promotes income equality by protecting the purchasing power of the poor who often do not have assets (real or financial) that allow them to hedge against inflation,” said the BSP.