[Puso at Diwa] BSP monetary policy: When steady is not really steady

It may be premature for monetary authorities to conclude that they can afford to be less aggressive in raising policy rates simply because economic growth has slowed markedly. Such a proposition is understandable, particularly when growth is losing altitude. But monetary policy is not made by looking at growth alone. And sometimes what appears to be caution in monetary policy can, under different circumstances, become a rather expensive form of complacency. The more fundamental question is not whether the policy rate is high or low in nominal terms. It is whether monetary policy is sufficiently restrictive in real terms. At a policy rate of 4.75% and headline inflation of 6.2% in July, the ex-post real policy rate is approximately negative 1.45%. That is not exactly the picture of a monetary policy stance straining the economy under an unbearable weight of tight money. Indeed, if inflation remains above the policy rate, keeping the nominal rate unchanged means allowing the real policy rate to remain negative. If inflation rises further, the real stance becomes even more accommodative. This distinction matters because monetary policy can be described as “steady” in nominal terms while becoming progressively easier in real terms. What looks like prudence on the surface can therefore amount to accommodation underneath. Given the poor growth performance of the economy, it is not unreasonable to assume a sustained negative output gap, with the Philippine economy operating below potential. Ordinarily, this would argue for a less restrictive monetary stance. But the more difficult question is whether monetary policy is actually the binding constraint on growth. The evidence suggests otherwise. Bangko Sentral ng Pilipinas (BSP) data show that average bank lending rates in the first five months of 2026 were only 3.09%, compared with 5.86% a year earlier. Broad money has remained reasonably buoyant, while bank lending has continued to expand at double-digit rates. By end-June, total bank loans were growing by almost 12%. This is hardly the landscape of an economy gasping for liquidity. Nor does the investment picture suggest that the principal obstacle to growth is the price of credit. Second-quarter GDP growth was only 2.3% year-on-year, while gross capital formation contracted by 9.2%. Businesses are not simply refusing to borrow because money is too expensive. They are hesitating because the returns on investment are uncertain, confidence is weak and the economic environment itself has become more difficult to read. The purchasing managers’ index tells much the same story. Unlike the first half of 2025, when readings generally pointed to expansion, particularly in services, four of the first six months of 2026 recorded contraction. The problem, then, may be less the cost of money than the cost of uncertainty. Business confidence has been negative for three of six months and close to neutral for two others. Businesses worry about oil prices, geopolitical tensions and the possibility that inflation will raise their operating costs. Consumers are hardly more sanguine. Consumer sentiment deteriorated sharply, from -15.8 in the first quarter to -42.0 in the second. The BSP itself attributed this deterioration to food and fuel inflation, geopolitical tensions, governance and corruption concerns, and weakening macroeconomic conditions. These are not problems that a central bank can solve by cutting interest rates. Indeed, this is where the argument for monetary restraint becomes clearer. We should not ask monetary policy to cure an ailment that it did not cause. But neither should we prescribe easier money for an economy whose principal ailments lie elsewhere. The inflation picture provides even less comfort for those arguing that the BSP can simply sit on its hands. Since March, headline inflation has remained above the 2% to 4% target. July inflation moderated to 6.2%, but that is still more than two-percentage points above the upper limit of the target range. Core inflation at 4.2% also remains above target. The direction may have become somewhat more benign, but the level remains decidedly uncomfortable. Monetary accommodation And inflation does not appear to be running out of ammunition. The Middle East conflict continues to threaten global oil prices and imported inflation. Agricultural prices remain vulnerable to weather disturbances and higher input costs. Food inflation was still elevated in July. These are precisely the circumstances in which inflation expectations can become less well anchored if monetary policy appears to be looking through the problem too readily. There is, moreover, little room for complacency when the BSP’s own inflation outlook remains above target. Its June projections placed inflation at 6.4% for 2026 and 4.5% for 2027. Whatever revisions may subsequently emerge from the Monetary Board’s August meeting, the essential point remains: inflation is not expected to return comfortably to target anytime soon. That should give pause to the argument for monetary accommodation. The surveys of economists reinforce this concern. In the BusinessWorld poll, 19 of 25 economists recommended a 25-basis-point increase, while only five preferred a hold. The Philippine Daily Inquirer poll produced a similar result, with 11 of 15 economists expecting a 25-basis-point increase. If the Monetary Board were to hold the policy rate this Thursday, August 27, the markets could reasonably conclude that the BSP is placing greater weight on weak growth than on its primary mandate of price stability. That would be unfortunate, not because growth does not matter, but precisely because monetary policy is not the instrument with which to repair the structural causes of weak growth. There is also a more subtle danger. When inflation is still substantially above target, a policy hold can be interpreted as a signal that the central bank is increasingly comfortable with the inflation trajectory. Markets may begin to read moderation in the latest monthly number as the beginning of the end of the inflation problem, rather than what it actually is: one encouraging observation in a still uncertain sequence. Central banking is, after all, partly about managing expectations. Once expectations become unanchored, bringing them back is considerably more painful than keeping them anchored in the first place. The BSP has been here before. The temptation is always understandable: growth is weak, businesses are unhappy, consumers are pessimistic, and there is an understandable desire to provide relief. But monetary policy should resist becoming the political analgesic for structural economic pain. The economy needs stronger growth. But stronger growth will not come from pretending that a negative real policy rate is tight enough. It will come from restoring confidence, improving governance, raising productivity, fixing agricultural supply constraints, accelerating infrastructure, strengthening investment and making the Philippines a more predictable place to do business. That is the work of the fiscal, trade, agricultural and other economic authorities. The BSP has a different job. It must ensure that the pursuit of growth does not come at the price of losing control of inflation. A weak economy is not an argument for ignoring inflation; it is an argument for using the right instrument for each problem. And that brings us back to the central misconception. A policy rate that is unchanged in nominal terms is not necessarily a steady monetary policy. When inflation is running above the policy rate, “hold” can quietly become “ease.” The danger is that the economy may then discover, rather too late, that what was presented as prudence was actually accommodation—and that the siren song of weak growth has merely prolonged the journey back to price stability. The BSP should not confuse a slowing economy with a mandate to loosen. Nor should it mistake a negative real policy rate for monetary restraint. Sometimes, the most prudent policy is precisely the one that refuses to be seduced by the immediate discomfort of slow growth into creating a much larger inflation problem later. – Rappler.com Diwa C. Guinigundo is the former deputy governor for monetary policy and other aspects of central banking. He was a former alternate executive director at the IMF in Washington, DC in 2001-2003. He is the author and editor of several books on political economy, regional crisis and cooperation, debt and economic growth and public policy agenda. He serves as independent director of several corporate and financial institutions with focus on corporate governance, risk oversight and audit. He also serves as principal advisor for New York-based GlobalSourcePartners. He remains in the advisory board of ASEAN Macroeconomic Research Office and Singapore Management University’s Sim Kee Boon Institute for Financial Economics. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong. Below are other Puso at Diwa columns by the author: