The Future of Aggressive Policy Easing A Risky Game

The Future of Aggressive Policy Easing A Risky Game

As the Bangko Sentral ng Pilipinas (BSP) prepares to meet this Thursday, former central bank deputy governor Diwa Guinigundo cautions against adopting an overly aggressive stance on monetary policy easing. Despite inflation appearing to be under control, external risks such as geopolitical tensions, supply chain disruptions, and volatile energy prices pose significant complications for policymakers.

In his commentary, Guinigundo emphasizes the need for caution in order to ensure price stability conducive to sustainable economic growth and employment. He notes that inflation forecasts may not fully account for external shocks, including the potential impact of global oil prices surpassing $90 per barrel and secondary effects on transport fares, food prices, and wages.

Guinigundo also highlights the potential inflationary impact of the US government's higher tariff policy, which could prompt retaliatory measures from countries such as Canada and Mexico. Additionally, he points out that lower taxes for big business may inflate domestic liquidity and fuel inflation, while deportation of immigrants may lead to lower wages for US businesses, particularly in services.

The analyst urges the BSP to anticipate and manage these spillover effects to keep inflation at bay. He argues that a rate cut may not be sufficient to drive growth, as it may not boost lending or encourage more economic activities. Instead, Guinigundo suggests that the credit channel could become a more effective tool of monetary policy in achieving economic growth.

This cautionary approach comes as most analysts expect a fourth successive 25-basis point (bps) cut, although some have predicted a pause following the US Federal Reserve's decision to keep interest rates unchanged last month. The consensus view is that of fewer rate cuts, with BSP Governor Eli Remolona Jr. stating last week that a 50-bps cut was likely for 2025 given lingering inflation risks.

The central bank expects inflation to remain within the 2.0- to 4.0-percent target range, with a risk-adjusted forecast of 3.4 percent. While these figures suggest room for policy easing, Guinigundo's warning highlights the need for monetary authorities to tread carefully in their policy decisions.

Keywords Aggressive Policy Easing, Monetary Policy, BSP, Inflation, Economic Growth, Interest Rates, Credit Channel

Edward Lance Arellano Lorilla

CEO / Co-Founder

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