The Bangko Sentral ng Pilipinas (BSP) said the inflation path remains consistent with its outlook and could still temporarily breach four percent in the next months amid upside risks and bad weather condition.

In a statement Wednesday, June 5, following the government’s announcement of a 3.9 percent consumer price index (CPI) for the month of May, the BSP said that while they are on-point in their forecast range of 3.7 percent to 4.5 percent, upside risks could return CPI above-the-target in the next months, possibly June to July. The government target range for CPI is two percent to four percent.

The central bank, however, said that the inflation outturn is consistent with its expectations that "inflation could temporarily accelerate above the target range over the near term due to adverse weather conditions on domestic agricultural output and positive base effects.”

But it also “expects average inflation to return to the target range for full year 2024 and 2025.”

It added that the risks to the inflation outlook is still skewed toward the upside. “Possible further price pressures are linked mainly to higher transport charges, elevated food prices, higher electricity rates, and increase in global oil prices,” it said.

The 3.9 percent May inflation, higher than April’s 3.8 percent, will figure prominently in the BSP’s next policy action which will be on June 27. BSP Governor Eli M. Remolona Jr. has already signaled that a rate cut is possible during their August policy meeting. It’s likely the BSP will still decide on a hold stance this month.

As of May 16, which was the Monetary Board’s last policy meeting, the BSP has a risk-adjusted inflation forecast of 3.8 percent for 2024 and 3.7 percent for 2025. It has also maintained the policy rate at 6.5 percent.

Based on the latest private sector economists’ inflation expectations’ survey, the CPI forecasts are not too far off from the BSP’s, which was 3.7 percent for 2024 and 3.5 percent for 2025.

Analysts expect within-target inflation over the policy horizon, but with lingering uncertainty it could settle at the higher end of the two percent to four percent target because upside risks continue to dominate due mainly to supply chain disruptions.

The BSP said that generally, inflation expectations are still well-anchored.

The main upside risks to the inflation forecast are the following: elevated prices of basic goods (particularly oil and food, including rice) owing to supply-side pressures brought by the geopolitical conflict in the Middle East; adverse impact of El Niño; and potential negative effect of La Niña in the second half of the year.

Analysts also cited downside risks that will come from: easing albeit still elevated food and non-food inflation, such as rice and oil; and waning inflationary pressures on prices as El Niño and base effects weaken in the near term.

On Tuesday, Remolona said with the decelerating inflation and if the growth remains on the soft side, they could reduce the policy rate by 50 basis points (bps) this year, and another 100 bps in 2025.

The BSP in a report said the projected impact of the BSP’s policy rate adjustments in 2022 and 2023 is likely to peak in the second half this year. It also noted that higher global crude oil prices and positive real interest rates could also temper domestic demand, thus resulting to slower growth that may not reach the government target of six percent to seven percent for this year.

The local economy grew by 5.7 percent in the first quarter. Although higher than the 5.5 percent in the fourth quarter 2023, this was still below the government target.