BSP urged to avoid ‘off-cycle’ easing

An off-cycle monetary easing could create bad optics for the Bangko Sentral ng Pilipinas (BSP), New York-based think tank GlobalSource Partners said, while urging the central bank to remain watchful of remaining upside risks to inflation and be “more patient” in keeping interest rates steady.

Diwa Guinigundo and Wilhemina Manalac, economists at GlobalSource, said an urgent easing outside of the scheduled policy meetings of the Monetary Board (MB) might stir up market concerns that the BSP has fallen behind the curve or waited too long to adjust rates.

Manalac and Guinigundo, both former high-ranking BSP officials, added that an off-cycle rate cut might upset inflation expectations.

READ: BSP poised to cut rates by at least 50 bps this year – ING economist

The powerful MB will meet today to review the policy rate, which is currently at an over 17-year high of 6.5 percent. If a rate cut doesn’t happen sooner, BSP Governor Eli Remolona Jr. had said the central bank was “always open” to an off-cycle adjustment.

“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,” the economists said. “Nor is it good for keeping inflation expectations.”

So far, analysts are divided on the upcoming monetary setting.

Some expect the BSP to kick off its easing cycle today after growth of consumer spending—which historically accounts for over 70 percent of gross domestic product—eased to 4.6 percent in the second quarter, the weakest seen postpandemic.

However, there are market watchers who believe that the above-target inflation rate of 4.4 percent in July could delay the rate cuts, although Remolona himself cited off-cycle easing as an option.

Appropriate monetary policy

Last week, Remolona struck a less dovish tone, saying a rate cut this month was “a little less likely” because the July inflation reading turned out “slightly worse than expected.”

Speaking to reporters last Tuesday, the BSP chief said the 6.3 percent year-on-year GDP growth in the second quarter was a “good” figure that might “help” the central keep monetary policy settings tight for the time being and minimize the risk of a hard landing.

Moving forward, GlobalSource said the BSP should ignore the “sirens’ song” that calls for an early rate cut for the sake of cheap credit alone. ”

Appropriate monetary policy is not about reducing the cost of borrowing to allow governments to borrow cheaply. Appropriate monetary policy is not about enabling consumers to borrow from lending institutions to spend on travel and other personal effects, even if that is within their discretion,” it said.

”Rather, appropriate monetary policy is all about ensuring that inflation is at an appropriate level that both business and households, and even governments, can ignore because price stability has produced the right costs for goods, services and money for them.”