Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said they will consider an easing of monetary policy stance when the consumer price index (CPI) is firmly within the mid-range of the target or around three percent.

“We’re looking at many, many numbers. If most of the numbers point in the right direction, including expectations, and they really settle into this comfortable rate of around 3% for inflation, then we will consider cutting rates,” he said in a press briefing on Wednesday, Dec. 20.

The BSP key rate or its target reverse repurchase (RRP) rate is currently at 6.5 percent after a cumulative 450 basis points (bps) rate increases since May 2022.

Meanwhile, the data-dependent BSP forecasts a risk-adjusted inflation rate of six percent for 2023, as previously announced during its Dec. 14 Monetary Board policy meeting.

As of end-November, the average CPI is at 6.2 percent, way above the target range of two percent to four percent for 2023.

For 2024, the risk-adjusted BSP inflation forecast is 4.2 percent and 3.4 percent for 2025. Risk-adjusted inflation forecasts take into consideration events or factors that are expected to happen at some point in time.

Remolona told reporters Wednesday that BSP is “unlikely to cut rates in the next few months” and is still on a hawkish “high-for-longer” policy stance as far as forward guidance is concerned. “When I say hawkish it means high-for-a-while,” he said.

For the first quarter 2024, he reiterated that BSP forecasts inflation will go below two percent based on base effects, but come the months of April to July – also because of base effects – inflation will rise above three percent.

“But for the year as a whole, we hope we will be within the target range, closer to the middle (mid-range) of the target. Closer to 4% than to 3% for the year as a whole,” he said.

The BSP chief said the base effects do not have any effect on monetary policy stance and they tend to “look through the base effects”.

“On the other hand if inflation – and we’re hoping it’s a trend – continues on its path and expectations are well-anchored, then we will start to consider easing (the policy rate),” he also said. The baseline CPI has been on a downtrend for the last two months. In November, it further dropped to 4.1 percent from 4.9 percent in October and from 6.1 percent in September.

The lower November inflation result is consistent with BSP’s CPI outlook as supply-side price pressures continue to ease as well as negative base effects.

However upside risks still persists such as higher transport fares, higher electricity and oil prices, and a higher-than-expected minimum wage adjustments in the National Capital Region.

The effects of El Niño weather conditions also continue to be a potential supply-side pressure to inflation.

“El Niño is a supply shock and if its impact is very large, then it will affect monetary policy. But if it’s smaller than we think, we tend to look through that supply shock,” said Remolona.

“We’re still not out of the woods when it comes to inflation,” he added.

In the first three months of 2024, Remolona said the drought or the prolonged dry period “will be bad” and for the second quarter “maybe” just as bad.

He said the El Niño is a supply shock “more or less we’re anticipating” and is already factored in their current risk-adjusted inflation forecasts for the year and in 2024.

BSP Senior Director Dennis D. Lapid of the Department of Economic Research said based on their analysis, the first quarter next year will have a “strong El Niño episode based on (government reports) while it is possible the strong episode will extend to Q2 (second quarter).”

“El Niño impact on pass-through food prices and power rates (are the) main challenges we’ve incorporated in the forecasts,” said Lapid.

The BSP’s baseline inflation projection for 2023 forecast is six percent, 3.7 percent for 2024 and 3.2 percent for 2025.

Considering the key upside risks or potential pressures to inflation, the BSP said what could reduce price pressures are the “impact of a relatively weak global recovery as well as government measures to mitigate the effects of El Niño weather conditions.”