EXPLAINING monetary policy decisions is as powerful as adjusting the policy rate at a time when uncertainty is ‘so high,’ according to BSP Governor Eli M. Remolona Jr.
In his speech at the ‘SEACEN Masterclass: Central Bank Communication,’ Remolona emphasized that ‘communicating monetary policy matters, especially today when uncertainty is so high.’
With global supply shocks, fragmentation, and other noises, people look to central banks for guidance, he explained.
‘We, central bankers, like to think that our most powerful tool is the policy rate. I believe explaining our decisions can be equally powerful,’ added the BSP governor.
While the policy rate moves money, he said the narrative behind it and where it might go ‘also shapes behavior.’
And that behavior, he said, ‘is often what we are after.’
Remolona emphasized that monetary policy ‘works best when our message is not just heard but understood.’
To illustrate the importance of forward guidance, former BSP Deputy Governor Diwa C. Guinigundo said in an earlier commentary that ‘central banking is [not only] about the current policy rate, but …also about shaping expectations of where policy is going.’
Guinigundo said if households, businesses and markets begin to believe that the central is becoming more concerned about weak growth than inflation remaining ‘substantially above target,’ expectations can become ‘less firmly anchored.’
Right signal
GUINIGUNDO released this commentary a few days after the Monetary Board (MB), the highest policy-making body of the BSP, decided to raise its policy rate by another 25 basis points on August 27.
While this was the ‘right decision,’ Guinigundo said the more important question is whether it was enough and, more importantly, whether the BSP’s message was ‘strong enough to convince markets that it remains firmly committed to bringing inflation back to target.’
When the commentary was issued in late-August, the former BSP deputy governor said the MB meeting on October 22 ‘will therefore be an important test.’
‘By then, the BSP will have more information on inflation, the peso, global oil prices, domestic demand and inflation expectations,’ Guinigundo said.
If inflation remains elevated and the real policy rate remains negative, he said simply holding the nominal rate unchanged could be interpreted by markets as a ‘further easing of the real monetary stance.’
That would be the wrong signal, Guinigundo said in August.
Fast forward to October 22, the MB delivered a larger-than-expected 50-bps hike in the key policy rate, bringing the BSP’s target reverse repurchase rate (RRP) to 5.50 percent.
Resisting temptation
THE MB based its decision after noting that the coming months could see a further acceleration of inflation, with the average headline inflation forecast for 2027, hence, revised upward to 6 percent from 5.4 percent.
‘The [MB] recognized the need for a strong monetary policy response to broadening price pressures and further upside risks to inflation,’ the BSP said in its statement on October 22.
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Such a ‘decisive response,’ the central bank emphasized, will make monetary policy ‘appropriately restrictive.’
‘This will contain second-round effects and firmly anchor inflation expectations,’ BSP noted.
The central bank said it stands ready to take further monetary policy action ‘as necessary’ to ensure the timely return of inflation to the target, in keeping with its price stability mandate.
In his August commentary, Guinigundo said the BSP should ‘resist the temptation to declare the tightening cycle effectively finished simply because growth is weak.’
‘This is not an argument for indiscriminate tightening or for ignoring growth. It is an argument for recognizing the hierarchy of responsibilities,’ added Guinigundo.
The former central bank deputy governor emphasized that the BSP’s primary mandate is price stability, adding: ‘Other authorities must deal with the structural and supply side impediments to growth.Asking monetary policy to compensate for weaknesses elsewhere risks creating the worst of both worlds: weak growth and persistent inflation.’