MONETARY authorities will likely be “more patient” in keeping key interest rates steady, a former Bangko Sentral ng Pilipinas (BSP) official said, amid expectations of a 25-basis point cut today or a possible off-cycle easing.
“We hope the monetary policymakers do not listen to the sirens' song,” former BSP deputy governor Diwa Guinigundo said in a GlobalSource Partners commentary issued on Tuesday.
“[A] change in monetary policy is not crucial at this point,” he said, noting robust second-quarter economic growth of 6.3 percent, lower 3.1 percent unemployment as of June, a manufacturing expansion, higher capacity utilization, and continued gains in the purchasing managers' index.
With inflation having hit 4.4 percent in July, above the market consensus, Guinigundo said that monetary authorities should be mindful of upside risks from factors such as higher food prices, transport charges, and power rate hikes.
“We are of the view that if there is anything that can undermine the integrity of inflation targeting and pull back the BSP's achievement in promoting price stability without causing a recession, it would be to adjust monetary policy for reasons other than prices and sustainable growth, in that order,” he said.
Monetary policy succeeded in that inflation had returned to the 2.0- to 4.0-percent target, Guinigundo noted, adding that June's decision to keep rates on hold despite increased downside risks to inflation was “particularly prudent.”
“If the BSP had eased monetary policy two months ago, its decision would have been awkward in the face of the 4.4 percent July inflation,” he said.
“While this may be a blip that may not result in a long-term trend, this single point might be enough to affect inflation expectations, disrupt capital inflows and drive the weakness of the peso, all of which are undesirable for controlling inflation.”
The BSP, which had flagged an August rate cut as early as May, has retreated somewhat following the release of the July inflation and second-quarter growth results. While a rate cut remains on the table, BSP Governor Eli Remolona Jr. has said that it is “a little bit less likely.”
An off-cycle adjustment is also an option, but Guinigundo said “this would not be good for optics because it would show that the patience of the BSP was too prolonged and well behind the curve.”
“Nor is it good for keeping inflation expectations anchored,” he added.
Appropriate monetary policy, Guinigundo said, should be about keeping inflation at a level that can be ignored by businesses, consumers and even the government, not reducing borrowing costs.
“In summary, it is our expectation that the BSP will be more patient in keeping its policy rate steady,” he said.
“After all, for the BSP, it is not about simply increasing or decreasing interest rates. The BSP has to likewise continue monitoring and weighing the impact of the exchange rate, long-term yields, short-term yields, and credit growth as well as other potential disturbances in the economy.”
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