MANILA, Philippines – Headline inflation is estimated to fall below 4% year-on-year by September or October 2023, according to Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla.

Medalla spoke to reporters on the sidelines of the Fintech Alliance Philippines General Membership Meeting on Monday, May 29.

“The message is, within target year-on-year already by September or October. And next year is slightly lower than the midpoint of our target,” he added.

For January to April, the average year-on-year inflation rate was at 7.9%.

But inflation has begun to slow down as the month-on-month rate has been near zero since January, according to Medalla.

“Ang dahilan diyan ay na-notice namin na after January, halos zero inflation. That is from one month to the next, hindi na halos gumagalaw ‘yung price index. Now, of course, that will be the temporary effect of prices being too high. Kapag naubos na ‘yon, baka mag normalize,” he said.

(The reason for this is that we noticed that after January, there was near zero inflation. That is from one month to the next, the price index almost did not move. Now, of course, that will be the temporary effect of prices being too high. Once that is over, it may normalize.)

The central bank governor attributed this to the decision of the government to relax the importation of goods in short supply, including onions, along with the effect of higher policy rates. Earlier in May, the BSP’s Monetary Board also chose to pause rate hikes after noting that inflation had begun to ease.

Barring a new shock, the average year-on-year inflation rate in 2024 could settle at 2% as the BSP’s monetary policy helps bring it back to the desirable range.

Medalla also noted that when looking at inflation figures year-on-year, they will clearly “be significantly less” in the coming months due to the base effect. For instance, he said, the inflation rate in January 2024 may even drop to below 2% – not because prices then will be very low, but because prices were so high in January 2023.

“Kaya mababa ‘yung inflation ay dahil mataas ‘yung previous (Inflation fell because the previous rates were higher),” Medalla said. “‘Pag nawala na ‘yung base effect (When the base effect disappears), our forecast is really, unless a new shock happens, is the average year-on-year next year will be 2%. In other words, back to normal.”

Maharlika fund is ‘okay’

Medalla also shared his thoughts on the proposed Maharlika Investment Fund, which is nearing approval in the Senate.

“The bill as it is now is okay. This is the product of long periods of discussion on the bill,” the BSP governor said. 

The proposal – a pet bill of President Ferdinand Marcos Jr. – steamrolled past the House of Representatives in only 17 days after the President certified it as urgent. Marcos also certified the Senate version of the Maharlika bill as urgent, which would allow for the imminent approval of the multibillion-peso investment fund.

“I don’t know what it’ll be used for, but the way it’s evolving now, very targeted, and it will have many good governance principles,” Medalla added.

The BSP chief described it as more of a “national development fund” that may also include investments addressing climate change.

Under the Maharlika fund proposal, the BSP will be required to contribute 100% of its total declared dividends in the first two years following the establishment of the Maharlika Investment Corporation (MIC). After that, the central bank will contribute 50% of its dividends while it continues building up its capital requirement. 

Once the BSP completes its P250-billion capital requirement, it will resume remitting 100% of its total declared dividends to the MIC until the national government’s P50-billion contribution to the fund is fully paid. The BSP’s Monetary Board may also request to modify dividend contributions given economic circumstances. – Rappler.com