The Bangko Sentral ng Pilipinas (BSP) on Friday maintained its hawkish stance, as inflation could exceed the target range in the second quarter because of the impact of the El Niño dry spell and second-round effects of supply shocks.
BSP Governo Eli Remolona Jr. said in an open letter to President Ferdinand Marcos Jr. that while inflation would likely settle within the target range in the first quarter of 2024 due to negative base effects, this “could temporarily accelerate above the target in Q2 2024 due to the potential impact of El Niño weather conditions, second-round effects of supply shocks and positive base effects.”
Inflation is projected to return to target in the third quarter of 2024 and settle near the midpoint in the fourth quarter of 2024 on expected decline in global oil prices.
“However, the balance of risks to the inflation outlook continues to be significantly skewed towards the upside for 2024 and 2025,” Remolona said.
“The upside risks could emanate from higher transport charges, increased electricity rates, higher oil and domestic food prices due to continued constraints on food supply, as well as the additional impact of a strong El Niño episode persisting until Q2 2024 on domestic and imported food prices as well as power rates,” he said.
Meanwhile, Remolona said the impact of a weaker-than-expected global recovery and successful implementation of government measures to mitigate the impact of El Niño weather conditions are the primary downside risks to the outlook.
“Should these risks materialize, the BSP’s risk-adjusted forecasts indicate that inflation could settle above target at 4.2 percent in 2024 before reverting towards the target band at 3.4 percent in 2025,” he said.
“Given the significant upside risks to food and transport prices—including from the continued constraints on international food trade—we wish to highlight the crucial role of non-monetary measures in helping to bring inflation back to a target-consistent path,” Remolona said.
Remolona said Executive Order No. 50, which extended the effectivity of reduced tariff rates on key agricultural commodities, could temper risks to food prices.
“Other supply-side measures will be equally important, including strategies to mitigate the potential impact of El Niño in communities, as well as efforts to boost the productivity of the agriculture sector,” he said.
“On the part of the BSP, we stand ready to adjust monetary policy settings as necessary to mitigate second round effects and better anchor inflation expectations, as we continue to prioritize safeguarding price stability in line with our primary mandate,” Remolona said.
The policy-making Monetary Board kept the overnight borrowing rate unchanged at 6.50 percent and the overnight deposit and lending facilities at 6.0 percent and 7.0 percent in its final meeting in 2023.