BSP keeps inflation target
The local currency started 2025 on a downward note, losing P0.36 centavos to the dollar on the first two trading days of the year as analysts see the greenback gaining ground on prospects of US interest rates remaining high for longer than initially expected.
The peso on Friday closed at P58.2 to the dollar, easing from P57.91 the day before.
Philippine inflation for December is due out tomorrow and analysts expect the figures to stay within the official target range. Although the central bank kept its inflation target band, an analyst emphasized a need to better manage market expectations so that price stability may be achieved for the medium to long term.
Michael L. Ricafort, chief economist for the Treasury Group of Rizal Commercial Banking Corporation, sees the full-year peso ending 2025 between P57.5 and P58.5, or possibly weaker than the 2024 close of P57.845.
“The performance of the US dollar/peso exchange rate would still be partly a function of intervention as consistently seen for more than two years already. The 59.00 record high closing rate has been respected for now and since the latter part of September 2022,” Ricafort said.
He stressed the need to “better manage inflation and inflation expectations to fulfill the price stability mandate that would also require stability in the peso exchange rate, which affects import prices and overall inflation.”
The Philippine government early last month said the local currency is expected to average between P57 and P57.50 to the dollar in 2024, revising it from an earlier assumption of P56 – P58.
For 2025, the government has also changed its peso assumption to the P56 – P58 range from P55 –
P58, but for 2026-2028 maintained it at P55 – P58.
Inflation within target
The Bangko Sentral ng Pilipinas (BSP) projects December 2024 inflation to settle within the range of 2.3 to 3.1 percent, with the full-year inflation seen averaging 3.2 percent, also within the target of 2-4 percent for 2024.
Nicky Mapa, chief economist at Metropolitan Bank & Trust Co., expects the December figure to come in at 2.5 percent.
For the BSP to maintain its current easing policy stance, he said the “target is consistent inflation in the coming months to give the BSP scope to continue easing in 2025. The BSP governor also indicates we’ll need substantial deviation in data to change course from the easing cycle.”
Jun Neri, economist at the Bank of the Philippines, puts his December inflation estimate 2.6 percent. “For the year we are looking at 3.3 percent,” Neri said.
The typhoons that battered parts of the country in October and November have caused supply pressures on key food items and logistics, which pushed prices higher in November to 2.5 percent, or at the lower region of the government’s target.
As inflation is expected to remain within the target range of the government for this year and next, the policymaking Monetary Board in its last meeting last year reduced the BSP’s Target Reverse Repurchase (RRP) Rate by another 25 basis points, bringing it down to 5.75 percent.
The interest rates on the overnight deposit and lending facilities were accordingly adjusted to 5.25 percent and 6.25 percent.
Ricafort said the key local policy rate of 5.75 percent is still higher by a total of +3.75 percentage points from the record low of 2 percent last seen on May 18, 2022.
“BSP Governor Remolona recently signaled about being open to another rate cut in its first rate-setting meeting in 2025 as rates are still somewhat restrictive, which would have also partly supported the peso exchange rate recently,” Ricafort said.
“Governor Remolona signaled that -1.00 rate cuts for 2025 may be a bit much, but would maintain a monetary easing posture and also pointed out that no rate cut for 2025 would be too little,” he added.
December’s tweak was the third consecutive 25-bps rate cut made by the Monetary Board for last year, totaling 75 bps.
Remolona said in his announcement “the within-target inflation outlook and well-anchored inflation expectations continue to support the BSP’s shift toward less restrictive monetary policy.
“The monetary authority will continue to closely monitor the emerging upside risks to inflation, notably geopolitical factors,” Remolona said.
The Board said the risk-adjusted inflation forecast for 2025 has risen slightly to 3.4 percent from 3.3 percent in the previous meeting.
Upward pressures
Acknowledging some upward pressures in December, however, the BSP said the increases could have stemmed from prices of major food items, owing to the supply disruptions from recent weather disturbances, as well as higher electricity rates and petroleum prices.
He said, nonetheless, these are expected to be offset in part by lower prices of agricultural commodities like rice.
“The BSP will continue to monitor developments affecting the outlook for inflation and growth in line with its data-dependent approach to monetary policy decision-making.”
The BSP also said it has decided to retain the current inflation target of 2.0 – 4.0 percent for this year up to 2027.
“The inflation target range of 2.0 – 4.0 percent remains an appropriate representation of the medium-term goal for price stability, given the current structure of the Philippine economy and the macroeconomic outlook over the next few years,” the BSP said.
By announcing a medium-term inflation target, the BSP aims to strengthen its forward-looking approach to monetary policy formulation with the view of helping anchor inflation expectations to the target.
“Prospects for aggregate demand and supply-side conditions point to a manageable inflation outlook despite upside risks. Inflation expectations likewise remain anchored to the current inflation target. The outlook for domestic aggregate demand will be supported by easing monetary conditions, improving labor market dynamics, and continued implementation of investment-enhancing structural reforms. At the same time, the risk of possible domestic and external shocks will warrant continued close monitoring and proactive intervention measures from the whole of government,” the BSP added.
