BSP vows to bring down  inflation to 2-4% target

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) assured Malacañang that the aggressive rate hiked it delivered and the implementation of non-monetary interventions by the government last year would help tame inflation back to the target by the second semester.

In an open letter to President Marcos, BSP Governor Felipe Medalla said inflation has already peaked in December and would decelerate this year due to easing global oil and non-oil prices, the negative base effects from transport fare adjustments in 2022, as well as the impact of the cumulative policy rate adjustments of the BSP.

“Inflation is expected to revert to the two to four percent target range by the second half of 2023,” Medalla said.

Inflation accelerated to 5.8 percent last year from 3.9 percent in 2021 after hitting a 14-year high of 8.1 percent in December from eight percent in November.

To ensure accountability in cases where the BSP fails to achieve inflation target, the BSP governor issues an open letter to the President outlining the reasons why actual inflation did not fall within the target, along with the steps that will be taken to bring inflation toward the target.

In his letter dated Jan. 24, Medalla said that the BSP would continue to adjust its monetary policy stance as necessary to keep further second-round effects at bay and to prevent inflation expectations from becoming disanchored.

“Our approach to monetary action will remain data-dependent and contingent on the inflation outlook, along with other available macroeconomic information at a given point in time,” Medalla explained.

The BSP raised key policy rates by 350 basis points, bringing the benchmark interest rate to a 14-year high of 5.50 percent from an all-time low of two percent to tame inflation and stabilize the peso.

The BSP chief pointed out that the balance of risks surrounding the inflation outlook are strongly skewed toward the upside in 2023 but remain broadly balanced for 2024.

The upside risks to the inflation outlook over the policy horizon, Medalla said, mainly stem from trade restrictions, increased prices of fruits and vegetables owing to possible domestic weather disturbances, higher sugar prices as well as pending petitions for transport fare hikes and potential wage adjustments in 2023.

On the other hand, he said the impact of a weaker-than-expected global recovery is the primary downside risk to the inflation outlook.

Based on its assessment last December, the BSP sees inflation averaging 4.5 percent this year, still higher than the two to four percent target, before easing to 2.8 percent next year.

The central bank attributed the steady rise in inflation to the increase in domestic fuel pump prices.

Additionally, a confluence of global and local supply shocks arising from significant increases in fertilizer and farming costs as well as lingering import restrictions on sugar drove food prices higher.

Medalla said robust pent-up demandalso began to contribute to price pressures, as shown in the higher core inflation for 2022.

The BSP chief added that the higher interest rate environment, increased volatility in financial markets and the depreciation of the peso against the dollar led to higher importation costs.

“Broadening inflation pressures have also given rise to second-order effects, in the form of approved petitions for transportation fare adjustments and minimum wage increases as well as a sustained buildup in the inflation expectations of analysts and the broader public,” he said.

According to Medalla, the successive increases in the monetary policy interest rate were aimed at bringing inflation back within the target range as soon as possible as well as to manage inflation expectations by mitigating second-round effects and tempering pressures on the peso.

The BSP chief also cited the timely implementation of non-monetary interventions by the national government, such as lowering import duties, providing subsidies, increasing market support, and efforts towards agricultural modernization to mitigate shortages of selected food commodities and strengthening farm productivity.