THE former deputy governor of the Bangko Sentral ng Pilipinas (BSP) said the central bank cannot afford to wait until all risks have materialized as doing so could confront a ‘more persistent inflation problem,’ which would require a longer period of restrictive policy later.
As such, Diwa C. Guinigundo, also an analyst and principal advisor at GlobalSource Partners, said a 50-basis-point increase ‘would send a stronger signal that the [BSP] is determined to prevent temporary supply shocks from becoming a lasting feature of the inflation environment.’
‘Delaying an appropriate response could allow inflation to persist, eventually producing possible demand destruction as households cut consumption because their real incomes can no longer keep pace with prices,’ Guinigundo explained in a commentary he published last Wednesday.
The former BSP official said monetary policy works with a lag. With this, he said waiting until all the risks have materialized could leave the BSP confronting a ‘more persistent inflation problem, requiring a longer period of restrictive policy later.’
Guinigundo explained further that while a quarter-point increase would continue the tightening cycle, it ‘may not adequately reflect the scale of the deterioration in actual inflation and the outlook.’
Difficult trade-offs
WITH the BSP itself projecting above-target inflation through 2027, Guinigundo said that a ‘more decisive’ initial response is ‘defensible.’
‘It would also help reinforce confidence that the [central bank] remains committed to its inflation target despite the difficult trade-offs,’ added Guinigundo.
However, this does not mean interest rates can bring down global oil prices, increase agricultural output, or reverse peso depreciation ‘directly.’
Instead, he explained that the purpose of tightening is to limit second-round effects: the possibility that higher food, fuel, and transport prices feed into wages, business pricing, and expectations of further inflation.
‘The challenge is to prevent an external price shock from becoming a more generalized and persistent domestic inflation problem,’ added the former BSP deputy governor.
‘Cuts both ways’
GUINIGUNDO also argued that the negative output gap of the Philippine economy does not eliminate the need to tighten.
‘The strongest argument against a larger increase is the weakness of domestic economic activity,’ he said.
GDP grew by only 2.3 percent year-on-year in the second quarter of 2026, while gross capital formation contracted by 9.2 percent.
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‘A sustained negative output gap suggests that actual output remains below potential, and further monetary tightening could weigh on borrowing, consumption, and investment,’ Guinigundo opined.
However, he pointed out that the risk to demand ‘cuts both ways.’
Higher interest rates can restrain spending, yet allowing inflation to continue surging can also destroy demand, he explained.
‘As food, fuel, electricity, and transportation absorb a growing share of household income, families have less to spend on other goods and services,’ Guinigundo said.
‘They may initially draw on savings or borrow to maintain consumption, but these adjustments cannot continue indefinitely. Eventually, households cut back, businesses experience weaker sales, investment is postponed, and hiring becomes more cautious,’ he added.
Guinigundo emphasized that this is an ‘important distinction’ as monetary tightening ‘deliberately restrains’ demand to help restore price stability.
Persistently high inflation, on the other hand, ‘erodes’ real purchasing power and can weaken consumption even without further rate increases, he added.
‘If the BSP holds back while prices continue rising, it may find itself confronting both high inflation and an increasingly fragile recovery,’ the former BSP official noted.
The Monetary Board, the highest policy-making body of the central bank, is set to have its fifth scheduled monetary policy meeting for the year on Thursday.