Upside inflation risks seen to linger

THE BANGKO SENTRAL ng Pilipinas (BSP) retained its 2-4% inflation target range through 2026, although risks to the outlook remain “strongly tilted to the upside.”

“The inflation target range of 3% ± 1.0 ppt (2-4%) remains an appropriate representation of the medium-term goal for price stability, given the current structure of the Philippine economy, recent economic developments, and the overall macroeconomic outlook over the next few years,” the BSP said in a statement on Thursday.

It noted the latest forecasts show inflation will likely decelerate next year and in 2025, “given limited demand-based inflation pressures amid improving supply conditions.”

“However, the risks to the inflation outlook remain strongly tilted to the upside for both years (2024-2025), which requires close monitoring as well as readiness for further action as needed,” it added.

The BSP has raised borrowing costs by a total of 450 basis points (bps) from May 2022 to October this year, bringing the benchmark rate to a 16-year high of 6.5%.

“The prevailing higher-for-longer stance of monetary policy, together with the implementation of the non-monetary measures by the government, is intended to ensure the sustained return of inflation to the medium-term target and keep inflation expectations anchored,” the BSP said.

The central bank expects inflation to average 3.7% next year and 3.2% in 2025.

The BSP earlier said that risks that could stoke inflation include higher transport costs, electricity rates, and oil prices. It also cited the strong El Niño episode that is seen to persist until the second quarter of 2024, as well as upcoming water wage hikes in Metro Manila.

Estimates by the BSP show that the El Niño weather event could impact inflation by 0.02 percentage point next year.   

The BSP said the current and projected inflation environment supports the economy’s steady growth.

The Development Budget Coordination Committee set next year’s gross domestic product (GDP) growth goal at 6.5-7.5%. It targets 6.5-8% GDP growth for 2025-2028.

“At the same time, enactment of structural reforms is expected to help boost prospects for domestic economic activity, raise productivity, and help build a sustainable non-inflationary economic growth,” it said.

The BSP said it will remain vigilant and data dependent in its monetary policy decisions in order to “steer inflation to a target-consistent path, fostering price and financial stability in the country.”

BSP Governor Eli M. Remolona, Jr. on Wednesday said that the central bank is unlikely to deliver any policy cuts in the next few months and is leaning towards keeping interest rates higher for longer.

The BSP will only begin policy easing if inflation settles into a “comfortable” range or the midpoint of its target band, he added.

The central bank earlier said inflation will settle within the 2-4% target in the first quarter but could potentially spike above target from April to July partly due to the El Niño weather event.

In November, headline inflation eased to 4.1%, marking the 20^th straight month that it breached the central bank’s 2-4% target band.

In the first 11 months of 2023, inflation averaged 6.2%. This was still above the BSP’s 6% full-year forecast. — Luisa Maria Jacinta C. Jocson