The Bangko Sentral ng Pilipinas (BSP) expects the inflation path to return to within the two percent to four percent target range by August this year but maintains that it could breach four percent for the month of July.
The current inflation expectations continue to convince the BSP to keep the target reverse repurchase (RRP) or policy rate on-hold at 6.5 percent since October 2023.
Based on the Monetary Board’s policy meeting minutes or highlights last May 16, which was released as scheduled by the BSP on Thursday, June 13, it noted that the most updated baseline inflation path is lower for 2024 but marginally higher for 2025 compared to the April forecasts.
It further noted that “inflation is expected to remain above the target range until July 2024” as constraints to domestic supply add pressures on the prices of key food items such as rice and corn, “while positive base effects emanate from the deceleration in food and energy inflation during the same period in 2023.”
“Nevertheless, inflation is projected to return to within the target range starting in August 2024 as pressures on food and crude oil prices ease,” said the BSP.
During the May 16 policy meeting, the BSP approved a risk-adjusted inflation forecast of 3.8 percent for this year and 3.7 percent for 2025. The 2024 risk-adjusted estimate is lower compared to the April forecast but higher for 2025 due to baseline projections.
The BSP said the projected impact of inflation risks is slightly higher compared to the forecasts from the April policy meeting. “Risk estimates for the transport sector have increased due to proposed jeepney fare hikes, higher taxi flag down rates, and approved toll fee adjustments. Additionally, risk weights on electricity rates, food prices, and energy costs have been revised upward due to supply constraints resulting from prolonged geopolitical tensions in the Middle East and Eastern Europe, well as the impact of El Niño weather conditions on agricultural production and energy demand,” it explained.
Risks to the inflation outlook remain skewed to the upside because of the following: higher transport charges and toll rates; increased prices of food commodities amid prolonged global supply constraints; higher electricity rates; and elevated global oil prices.
“The Monetary Board deemed it appropriate to maintain the BSP’s monetary policy settings until inflation settles firmly within the target range. Inflation expectations also continued to be broadly anchored, with mean and median forecasts staying within the target range for 2024 to 2026,” said the BSP.
The inflation rate in May increased to 3.9 percent versus 3.8 percent in April. The BSP said they expect the consumer price index (CPI) to be above the two percent to four percent target in June and July.
Mainly, the central bank expects an above-target CPI this month and in July because of upside risks and bad weather conditions.
The 3.9 percent May inflation will figure prominently in the BSP’s next policy action which will be on June 27.
BSP Governor Eli M. Remolona Jr. has already signaled that a rate cut is possible during their August policy meeting. It’s likely the BSP will still decide on a hold stance this month.
Based on the latest private sector economists’ inflation expectations’ survey, the CPI forecasts are not too far off from the BSP’s, which was 3.7 percent for 2024 and 3.5 percent for 2025.
Analysts expect within-target inflation over the policy horizon but with lingering uncertainty, it could settle at the higher end of the two percent to four percent target because upside risks continue to dominate due mainly to supply chain disruptions.
Remolona has said that with the decelerating inflation and if the growth remains on the soft side, they could reduce the policy rate by 50 basis points (bps) this year, and another 100 bps in 2025.