Manila: Philippine monetary officials are closely monitoring domestic inflation, which is anticipated to peak at 3.6 percent due to supply-side factors.

According to Philippines News Agency, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. discussed the inflation outlook in an interview with CNBC Asia. He noted that while the expected inflation rate is higher than the previous year, it remains within the government's target band of 2 to 4 percent. Remolona emphasized that the rise in inflation is largely driven by supply-side factors, and the core inflation is projected to decrease. He highlighted the importance of vigilance, as significant supply-side inflation can have spillover effects.

In January, the inflation rate increased to 2 percent from the previous month's 1.8 percent, driven by faster price increases in the housing, water, electricity, gas, and other fuels index. This increase marked the first time inflation rose within the government's target band after dipping to 1.8 percent in March last year.

Despite the inflation rates being within target levels, the BSP's Monetary Board reduced the central bank's key rates by another 25 basis points on Thursday, totaling a 225 basis point cut since August 2024. Governor Remolona explained that the rate reduction aims to bolster confidence in the domestic economy, which suffered from weak output in the latter half of the previous year, partly due to flood control issues.

The country's domestic output, measured by GDP, slowed to 3.9 percent in the third quarter of last year from the previous quarter's 5.5 percent, further declining to 3 percent in the last quarter. This brought the full-year output to 4.4 percent, down from 5.7 percent in 2024. Remolona stated that growth and confidence are interconnected, with each influencing the other. He suggested that addressing growth could help restore confidence, potentially leading to increased growth in the future.

The BSP has developed a dictionary containing words related to confidence and constructed an index of sentiment that they monitor. Although the index is currently down, Remolona noted signs of recovery, which they refer to as "green shoots." He expressed hope that the recent policy rate cut will help nurture these signs of recovery.