THE full impact of aggressive policy tightening is expected to be felt this year and monetary authorities remain ready to adjust interest rates to ensure price stability, the Bangko Sentral ng Pilipinas (BSP) said.

In an open letter to President Ferdinand Marcos Jr., central bank Governor Eli Remolona Jr. said the "lagged effects of prior policy interest rate adjustments are expected to manifest fully in 2024."

The BSP's benchmark rate currently stands at 6.5 percent, the highest since 2007, following 450 basis points of rate hikes beginning May 2022.

The policymaking Monetary Board has held fire for the last two meetings following an off-cycle increase last November, saying it wanted to see how the rate hikes were working their way through the economy.

Remolona reiterated this, saying that pausing has allowed the BSP to "further observe and assess how firms and households continue to respond to tighter monetary policy conditions."

He reaffirmed the central bank's commitment to adjust policy settings as needed to mitigate second-round effects and better anchor inflation expectations in line with the mandate of preserving price stability.

In 2002, the BSP embraced inflation targeting as part of its responsibility to foster price stability for "balanced and sustainable" economic growth.

The approach involves setting a specified inflation target for the central bank to achieve over a certain period, using various policy tools like interest rates and bank reserve requirements.

The target has been set at 2.0 to 4.0 percent since 2019. Before that, it was in the range of 3.0 to 5.0 percent from 2015 to 2018.

Inflation began surging in 2022 following Russia's invasion of Ukraine. It peaked at 8.7 percent in January 2023, mostly trended lower for the rest of year but still averaged above target at 6.0 percent.

Remolona noted that the BSP expects inflation to settle within target in the first quarter of 2024 due to base effects, but then top 4.0 percent in the next three months due to the potential impact of El Niño weather conditions and the second-round effects of supply shocks, among others.

The rate is projected to return to target in the third quarter of 2024 and settle near the midpoint in the last quarter, supported by a decline in global oil prices.

"Should risks materialize, the BSP's risk-adjusted forecasts indicate that inflation could settle above target at 4.2 percent in 2024 before reverting towards the target band at 3.4 percent in 2025," Remolona said.

The central bank issues an open letter if the inflation target is missed, explaining the reasons why and the steps to be taken to achieve the goal. No letters were issued from 2009 to 2014 as inflation targets were hit.