The Bangko Sentral ng Pilipinas (BSP) reiterated on Thursday, Jan. 5, in its medium-term assessment that inflation will start to lose its steam after peaking in December at 8.1 percent, but which is lower than its target band for the month.

The central bank had targetted inflation to peak in December at 7.8 percent to 8.6 percent target band. The 8.1 percent inflation in December has brought the actual full-year average at 5.8 percent, which is also on point with BSP’s previously announced 2022 average forecast of 5.8 percent.

The BSP said the latest 8.1 percent inflation, up from November’s eight percent, is consistent with its assessment of elevated inflation that will hit its high in December before slowing down in 2023.

“(Inflation is) decelerating in the succeeding months due to easing global oil and non-oil prices, negative base effects, and as the impact of BSP’s cumulative policy rate adjustments work its way to the economy,” said the BSP.

The central bank likewise reiterated the risks to the inflation outlook which remain tilted to the upside this year and broadly balanced in 2024.

The expected upside risks to inflation over the policy horizon stem mainly from elevated international food prices due to high fertilizer prices and supply chain constraints, said the BSP.

“On the domestic front, trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices, pending petitions for transport fare hikes, as well as potential wage adjustments in 2023 could push inflation upwards,” it added. The impact of a weaker-than-expected global economic recovery continues to be the primary downside risk to the outlook.

The BSP said it will “take all monetary policy action necessary to bring inflation back to a target-consistent path over the medium-term.”

“The BSP also continues to support the timely implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation,” it said.

The stronger peso vis-à-vis the US dollar in recent weeks, as well as the lower prices of rice and petroleum contributed to the slight easing of price pressures for December which did not climb to a high of 8.6 percent. Some analysts even placed the inflation rate at 8.4 percent for December.

The BSP had thought previously that inflation will peak in October but typhoons and consistent weather disturbances continued to affect supply chains.

BSP Governor Felipe M. Medalla said the exchange rate at the P55 level is no longer a source of worry as far as inflation is concerned, for now.

Medalla is confident that inflation will slow down in the next months due to the impact of BSP’s 350 basis points (bps) cumulative policy rate adjustments in 2022.

It expects inflation path to return to within the target band of two percent to four percent by the third quarter this year and will approach the lower end of the range by the mid-2024.

As of Dec. 15, 2022, the BSP policy rate is at 5.5 percent. Medalla has already signalled to the market that it will implement at least two more rate hikes this quarter. The market expects the BSP will raise the key rate by at least 25 bps on Feb. 16 and another 25 bps on March 23.

The two additional BSP rate increases will ensure inflation will reach the target range within the year, said the BSP chief.

For 2023, the BSP forecasts inflation at 4.5 percent, still above the two percent to four percent target. Next year, the forecast is 2.8 percent. Medalla said the 2024 inflation forecast was anchored on the further easing in oil prices, the expected peso appreciation, and the slightly lower domestic growth outlook resulting in part from the BSP’s cumulative policy rate adjustments.