The Bangko Sentral ng Pilipinas (BSP) said Friday, April 5, that inflation has remained firmly within the target range at 3.3 percent average in the first quarter of 2024 but they expect it to breach the two percent to four percent target band in the second and third quarter due to adverse weather conditions.

In a statement, the BSP said the March consumer price index (CPI) of 3.7 percent which was higher than February’s 3.4 percent and January’s 2.8 percent, is still consistent with its outlook.

“The inflation outturn is consistent with the BSP expectations that inflation will likely remain within the target range in Q1 2024 due largely to negative base effects. However, inflation could temporarily accelerate above the target range in the next two quarters of the year due to the possible adverse impact of adverse weather conditions to domestic agricultural output and positive base effects,” said the BSP.

The 3.7 percent was within the BSP’s March CPI forecast range of 3.4 percent to 4.2 percent.

It further noted that “the risks to the inflation outlook remain tilted toward the upside.”

“The upside risks to the inflation outlook could emanate from higher transport charges, higher prices of food commodities facing supply constraints, increased electricity rates, higher global oil prices, and implementation of a legislated increase in the minimum wage,” the BSP added.

The Monetary Board, the central bank’s policy-making arm, will meet on Monday, April 8, for its policy rate meeting. The original schedule was April 4, but the BSP moved the date to wait for the CPI report.

The BSP said the Monetary Board “will consider the latest inflation outturn in its upcoming monetary policy meeting” and that it will continue to “support the National Government’s non-monetary measures to address supply-side pressures on prices and sustain the disinflation process.”

The BSP has been relying on the government’s non-monetary measures to curb supply side pressures on prices particularly since the El Niño weather is expected to last longer than originally expected. The adverse impact of the weather phenomenon on agricultural production will likely hike inflation above the target range from the second quarter.

For now, inflation upside risks continue to be the higher transport charges, increased electricity rates, higher oil and domestic food prices, and the additional impact on food prices of a strong El Niño episode, said the BSP.

As of the last Monetary Board policy meeting on Feb. 15, the BSP’s risk-adjusted inflation forecast for 2024 is 3.9 percent and 3.5 percent for 2025. This will be revised next week.

The market expects the BSP will still keep the 6.5 percent benchmark rate for some time. It is unlikely that the BSP will cut its benchmark rate ahead of the US Federal Reserve (US Fed) as this might lead to sharp exchange rate fluctuations. The peso is considered stable at the moment at P55 to P56 level vis-à-vis the US dollar.

Most analysts expects the US Fed will start reducing its own interest rates by June this year.

The BSP tries to maintain an interest rate differential of 100 basis points (bps) to 150 bps between the US Fed rate and the target reverse repurchase rate or the policy rate to remove volatility pressures from the peso-US dollar spot market.  

Two factors have put BSP at ease as it remained on a hold stance: the relatively better than expected gross domestic product (GDP) growth performance in 2023 and the decelerating inflation.