The Department of Finance (DOF) said the projected slowdown in inflation this year would not only be favorable for consumers, but it may also serve as a reason for the Bangko Sentral ng Pilipinas (BSP) to reduce borrowing costs.

Finance Secretary Benjamin E. Diokno said on Monday, Jan. 8, that the rate of inflation, which measures the increase in consumer prices, is expected to decrease to between 2.0 percent and 4.0 percent this year from 6.0 percent last year. 

The average inflation for 2023 was the highest in 15 years, or since the global financial crisis in 2008.

“It [inflation] might increase slightly in the second quarter because of base effect but for the whole year of 2024 it would be within the target band of two to four percent and that’s good news,” Diokno said in an interview with Bloomberg television.

Since taking office in June 2022, the Marcos administration has grappled with a significant upsurge in inflation, reaching levels not seen in 14 years at the beginning of last year, mainly due to the escalation of food and fuel costs.

But Diokno said that if inflation is brought under control, it could lead the Monetary Board, which makes decisions for the BSP, to lower the current interest rate of 6.50 percent.

High interest rates make it costlier to borrow money, which can make it harder for consumers to afford big purchases. It can also slow down the economy, making it tougher for people to find jobs and for businesses to expand.

“We observe what’s happening abroad principally, what’s happening at the Fed [US Federal Reserve], so a 75 basis points cut by the Fed this year could actually be matched by the central bank by 100 basis points,” Diokno said.

“I see like 5.5 percent [policy rate] by the end of 2024,” he added. “The timing of course will be data dependent and probably towards the second semester of next year.”

In its analysis, Metrobank Research, the research unit of Metropolitan Bank & Trust Co., said the easing of inflation gives the BSP more room to adjust the country's monetary policy stance. 

After raising interest rates to control inflation and stabilize the peso, the Monetary Board is expected to decrease the benchmark interest rate by 100 basis points this year, according to Metrobank. 

After 20 months of staying above the range, headline inflation in December finally eased to 3.9 percent, within the BSP's two percent to four percent target.

The BSP said the recent inflation aligns with its projections of a likely moderation in the near term, attributed to reduced supply-side price pressures and negative base effects. 

However, the BSP also noted that the risks to the inflation outlook continue to lean significantly towards the upside.