Communication a powerful monetary policy tool – BSP

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has been using communication as a powerful monetary policy tool over the past two decades, particularly during the height of the  COVID pandemic.

Over the years, the BSP has maintained transparency and communication by disclosing the factors that went into its policy decisions through the publication of the Monetary Policy report.

In a boxed article in its 2022 Annual Report titled “Communicating a Forward-Looking Monetary Policy: The BSP’s Monetary Policy Report,” the central bank said that central to its inflation targeting framework that was adopted in 2002 was to establish and maintain a well-anchored inflation expectations.

In the report, the BSP discusses recent developments affecting inflation, other factors influencing the central bank’s policy decisions, as well as the risks surrounding the inflation outlook.

Being a truth teller, the BSP believes communication is in fact important not only as a means to convey information about monetary policy, but also as a policy tool for the central bank.

Most central banks, including the BSP, consider transparency and communication as integral components of their monetary policy framework.

Decisive actions

Former BSP governor Felipe Medalla said monetary authorities acted decisively during the height of the pandemic as they raised key policy rates by 425 basis points to fight inflation and stabilize the peso that slumped to an all-time low of 59 to $1.

During his stint as BSP governor from July 2022 to July 2023, Medalla said the country encountered unprecedented challenges, over which the central bank has little control, as supply chain disruptions overseas and in the Philippines triggered price hikes.

“We had to act decisively. And we did,” Medalla said in his farewell speech.

In January, inflation soared to a 14-year high of 8.7 percent   after accelerating to 5.8 percent in 2022 from 3.9 percent in 2021 due to elevated global oil and food prices.

Inflation averaged 7.2 percent in the first half of the year, way above the BSP’s two to four percent target range, despite cooling to 5.4 percent in June from 6.1 percent in May.

According to the BSP, the role of communication in monetary policy has expanded following the global financial crisis in 2008 that led to the use of unconventional monetary tools to achieve inflation target.

Central banks, including the BSP, turned to providing forward guidance as traditional policy tools, like interest rates, reached their limits.

This forward guidance served as the central bank’s act of communicating its monetary policy intentions in the future based on the state of the economy.

“In addition, we communicated our policy actions and explained why we were doing them through forward guidance,” Medalla said.

Bring inflation  back to target

The BSP is optimistic that inflation will ease within its two to four percent target by the fourth quarter  after breaching the range since April 2022.

It sees inflation easing to 5.4 percent this year, 2.9 percent next year, and 3.2 percent in 2025 after accelerating to 5.8 percent last year.

Combined with non-monetary measures, such as the importation of critical agriculture products such as rice and sugar, the monetary actions helped reduce second-round effects and re-anchor inflationary expectations.

Together with active intervention in the foreign exchange market, the peso also rebounded back to the 53 to $1 handle in February after hitting an all-time low of 59 to $1 in October last year. The local currency is now trading between the 55 and 56 level.

“Our more stable exchange rate helps us avoid excessive depreciation that may dislodge inflation expectations and add to inflationary pressures. For those of you who have taken monetary economics, in a standard economics textbook on inflation targeting, there is hardly any mention of the exchange rate, aside from saying that to a good inflation-targeting central bank, the exchange rate does not matter until it does,” Medalla said.

The BSP shifted to the Monetary Policy Report in 2022 as it was gradually unwinding from pandemic-related measures amid the fragile signs of economic recovery.

With the report, the BSP steered the expectations of financial markets and the public toward an orderly policy pivot by communicating the course of its near-term actions based on the emerging state of the economy.

The central bank aims to further enhance monetary policy transmission to safeguard price stability.

“With the enhancements to its monetary policy communication strategies, embodied in the shift to the Monetary Policy Report, the BSP aims to provide credible and firm guidance as it utilizes all its monetary tools to bring inflation to target,” the central bank said.

Uncomfortable truths for monetary policy

In a recent forum organized by the European Central Bank, International Monetary Fund deputy managing director Gita Gopinath talked about three uncomfortable truths for monetary policy.

These are: inflation that is taking too long to get back to target, financial stresses  that could generate tension between central banks’ price and stability objectives and central banks that are likely to experience more upside inflation risks than before the   pandemic going forward.

Gopinath said effective communication is important so that monetary actions would not be misrepresented as waning resolve to fight inflation.

“The battle against inflation is very much ongoing, both in the euro area and around much of the world.  Headline inflation has declined, but the stickier components remain persistently high. Central banks must continue to fight high inflation now, while also determining if – and how – monetary policy strategy may need to change in the future,” Gopinath said.

Continuity

Newly appointed BSP Governor Eli Remolona Jr. has vowed continuity and to build on the progress made by his predecessor.

“Together we must build on the progress we have already made. Inflation has finally started to come down as governor Philip explained. And if our models are right, we should be back in our target range even by the end of this year,” Remolona said during the turnover ceremony.

Remolona said during the recent Philippine Economic Briefing in Toronto, Canada that the BSP is determined to bring inflation back toward its target range.

“Our immediate challenge now is inflation. We were hit by very unusual supply shocks, a confluence of unusual supply shocks,” the BSP chief said.

According to Remolona, the BSP adheres to inflation targeting framework as it focuses on price stability.

The BSP believes that communication is key for effective policy execution.

“The whole of the financial system is greater than the sum of its parts. As such, the BSP recognizes that executing its financial stability mandate and implementing macroprudential policies will be more effective when people understand them on a practical level,” it said.