Too early to declare win vs inflation – BSP

MANILA, Philippines — As the headline rate maintains a downward trend and progresses toward its target, it remains premature to proclaim a definitive victory over inflation, according to Bangko Sentral ng Pilipinas Governor Eli Remolona.

His statement comes after inflation eased for the fifth straight month and settled at 5.4 percent in June on the back of easing supply side constraints, lower global oil prices and the policy actions undertaken by the BSP.

As inflation picked up in 2022, the BSP tightened monetary policy aggressively and jacked up rates by 425 basis points over a year.

“Today, we are beginning to see the fruits of our efforts. Nonetheless, it’s too soon to declare victory,” Remolona said during the annual reception of the banking community late Friday night.

“Core inflation remains high and there are still upside risks to inflation in the form of El Niño and further supply shocks,” Remolona said.

July inflation data will be out in the first week of August and this will be a major factor in the analysis of the Monetary Board as it decides on policy rates by the middle of next month.

The US Federal Reserve, in its policy meeting this week, lifted rates by 25 basis points and remains open for another hike in September.

The BSP has been on pause for two straight meetings amid indications of its previous monetary tightening exerting its impact on the economy.

BSP Deputy Governor Francisco Dakila earlier maintained that the central bank is always ready to act depending on the latest market condition and ensure that inflation will be on a path consistent to the targets.

“The BSP remains watchful and ready to resume monetary action as warranted by the data on inflation outlook and domestic demand prospects. The focus remains on bringing inflation back to target,” Dakila said.

While the average headline rate of 7.2 percent is still way above the target band, the BSP is confident this will return to the range by the fourth quarter of the year.

Based on BSP’s projection, inflation will ease but will still be above target at 5.4 percent this year barring any unforeseen shocks especially coming from the supply side.

This will cool down significantly to 2.9 percent in 2024 largely due to base effects.

Meanwhile, Remolona acknowledged the banking system’s contribution to the country’s recovery from the pandemic.

“What is the difference this time? it was the banking system as banks maintained more than adequate levels of capital and remained flushed with liquidity,” Remolona said.

“This time, there is no need to repair the balance sheets. Unlike in previous crises, this time our banks are part of the solution rather than part of the problem,” he said.