IMF calls for balanced monetary policy

MANILA, Philippines — The International Monetary Fund (IMF) has called for a cautious and adaptive approach to monetary policy by the Bangko Sentral ng Pilipinas (BSP), as the Philippines faces increasing risks from supply-side shocks and inflationary pressures.

In its staff report following the IMF’s Article IV consultation, the multilateral lender said monetary policy in the Philippines may need to be adjusted to more frequent and severe supply-side shocks moving forward.

“The frequency, severity and persistence of adverse supply shocks may increase in the future, for instance due to climate change and rising geo-economic fragmentation,” the IMF said.

“The BSP will need to be careful in ‘looking through’ them to ensure second-round effects do not lead to a de-anchoring of inflation expectations,” it added.

The IMF said that inflation dynamics in the Philippines have increasingly been shaped by supply factors rather than demand. This trend reflects the country’s high reliance on imported fuel and food, limited application of price controls, and vulnerability to adverse climate events.

Therefore, the BSP must strike a balance between addressing immediate inflation risks and maintaining long-term price stability, the IMF said.

It noted that the BSP has room to gradually reduce its policy rate as it transitions toward a neutral monetary stance.

Since mid-2023, the BSP has adopted a more restrictive policy stance, which the IMF deemed appropriate given the inflationary environment at the time. But with inflation returning to target and signs of a negative output gap emerging, the IMF suggested a measured reduction in policy rates.

“With inflation risks tilted to the upside, the BSP must remain vigilant to future shocks and their second-round effects. At the same time, downside risks to growth, including from a weaker-than-expected recovery in domestic demand, could warrant a swifter policy rate reduction,” it said.

However, a data-dependent approach and careful communication around monetary policy adjustments will be important to manage expectations amid uncertainties.

“Over time, the BSP can consider further enhancing its communication framework by expanding its use of forward guidance in line with IMF technical assistance advice,” it said.

The BSP has delivered a total of 75 basis points of rate cuts since August as it shifts toward a less restrictive monetary policy stance. This brought the key rate down to 5.75 percent from 6.50 percent at the start of the year.

Prior to the cuts, the BSP had maintained its policy rate for six consecutive meetings since November 2023. From May 2022 to October 2023, the central bank had aggressively raised rates by a total of 450 basis points to rein in inflation.

The multilateral lender also acknowledged the BSP’s approach of allowing the exchange rate to act as a shock absorber amid shifting expectations regarding US monetary policy. However, foreign exchange interventions could be warranted under specific conditions to mitigate risks associated with abrupt currency fluctuations.

“Given the Philippines’ shallow forex markets and the nonlinear impact of exchange rate fluctuations on inflation expectations, foreign exchange intervention can play a role in mitigating risks associated with abrupt exchange rate movements,” the IMF said.

“But the deployment of foreign exchange intervention should be temporary and targeted,” the IMF advised, adding that it should not replace necessary macroeconomic adjustments.

The Fund also encouraged the BSP to deepen domestic foreign exchange markets to reduce reliance on intervention over the long term.