The Bangko Sentral ng Pilipinas (BSP) expects inflation for the month of July to be above-the-target at four percent to 4.8 percent due to higher power rates.

The BSP has long prepared the market to anticipate that inflation could peak in July and will exceed the government target range of two percent to four percent. If the consumer price index (CPI) does hit what the BSP predicted, it will be significantly higher than the June CPI of 3.7 percent.

In a statement Wednesday, July 31, the BSP said inflation could hit a high of near five percent due to higher electricity rates as well as the higher prices of select agricultural commodities such as vegetables, meat, and fruits.

It noted the elevated domestic oil prices which are among the “primary sources of upward price pressures for the month.”

Still, the BSP is hoping July inflation could be a flat four percent amid the stronger local currency vis-à-vis the US dollar. It also pointed to the lower rice and fruit prices which could hold the CPI closer to the higher end of the official target band.

“Going forward, the BSP will continue to monitor developments affecting the outlook for inflation and growth in line with its data-dependent approach to monetary policy formulation,” said the central bank.

The Philippine Statistics Authority will release the July CPI numbers on Aug. 6. The BSP’s Monetary Board will meet on Aug. 15 for its fifth of seven policy meetings for the year.

While expecting CPI to peak in July, the BSP projects the inflation path will return to within the two percent to four percent target range by August.

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.

The BSP 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.

BSP Governor Eli M. Remolona Jr. had signaled more strongly that the BSP is not going to wait any longer and may cut the policy rate on Aug. 15 after the government reported a lower inflation rate for the month of June. Year-to-date, CPI averaged at 3.5 percent, well within the target range.  

Besides the inflation outlook, the BSP is looking more closely at the exchange rate at P58 vis-à-vis the US dollar since it affects inflation. The BSP also carefully monitors the data on the output gap because this could affect the timing of when to cut the policy rate.

Remolona said the output gap, which is the difference between the country’s output and capacity is “what we call the natural rate of interest, which is the interest rate that balances supply and demand for the Philippines.”

For this year and in 2025, the BSP risk-adjusted inflation forecast is 3.1 percent.

Rice prices have been driving up inflation since August last year. Before that in 2022, it was oil prices and then it shifted to food prices as primary source of price pressures.