Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. vows to maintain a credible central bank and Monetary Board in terms of the data they rely on as an inflation-targeting BSP, and in the transparency of its forward guidance.
“If we’re credible, the (inflation) target serves to anchor inflation expectations and tends to minimize second-round effects,” he said in the latest Philippine Economic Briefing (PEB) in IloIlo which was organized by the BSP and the Department of Finance.
“That’s what we’re doing with monetary policy. We’ve been watching inflation expectations closely. We’re making forward guidance, we’ve been telling the markets this is what we’re going to do in the next few meetings, to help anchor expectations and reduce second round effects,” he said in his opening remarks during Monday, Dec. 11’s PEB.
To reporters earlier, Remolona expressed his confidence that BSP has “shifted” in the way they do forward guidance to make it more transparent and credible. He noted that similar with central banks, the BSP “emulates” the style of the US Federal Reserve’s policy-decision body, the Federal Open Market Committee (FOMC).
In the Philippines, the BSP’s Monetary Board is its FOMC. “The market expects us to be like FOMC,” he said in Filipino. However the BSP uses more forward guidance in terms of languange, such as supply shocks, inflation expectation and second-round effects.
“(We’re) shifting towards (more transparent) forward guidance … we’re serious about it now,” said Remolona.
In the panel discussion during the IloIlo investors’ briefing, the BSP chief said there are challenges in delivering forward guidance since in the Philippines, the economy “was unusually strong” but “at the same time, we got hit by supply shocks.”
“The combination of those two things is very unusual. Monetary policy had to use some judgement, well we continue to use the models that we have, but we have to use some judgement,” he told PEB participants.
He said market expectations were also unusually important because inflation expectations, especially if disanchored from the BSP inflation target, lead to second-round effects.
“When it comes to expectations, we need more data on expectations, we need more surveys. The idea was to prevent our inflation expectations from becoming de-anchored,” said Remolona.
He added, “but we managed to keep our inflation expectations under control, anchored to our target. That means, more data, more different kinds of data.”
The BSP chief also emphasized their focus on “better communication” to have a market and a public that are equipped with accurate information as much as possible.
“We’ve been working with our forward guidance. We have two tools, we have the interest rate, but we try not to do any unnecessary tightening. Then there’s another tool, forward guidance, which is communicating with the public, essentially what we’re trying to do with inflation and that seems to keep inflation under control,” said Remolona.
Last year, the BSP revised its quarterly inflation report and replaced with a monetary policy report (MPR) which is a clearer, detailed and more frequent signalling of its monetary policy stance.
The MPR contains BSP’s views and outlook for inflation and growth and, when necessary, provide forward guidance.
Forward guidance is a tool used by the BSP and other central banks to convey or telegraph future monetary policy stance and direction for the guidance of the markets, businesses and consumers.
The difference between the MPR and the inflation quarterly report – while both under the BSP’s Inflation Targeting Framework -- is that the MPR will have more transparency and increased disclosure and communication by the BSP of its policy decisions.
The MPR is published four times in a given year and it corresponds with the availability of major economic data releases such as the quarterly national income accounts, said the BSP.
The BSP normally use all types of forward guidance to help calm markets. The Monetary Board has been known to give purely qualitative forward guidance which are broad statements that give an overview of the likely future path of monetary policy.
These days, the most common BSP forward guidance is to reaffirm its hawkish stance by saying that it is “necessary to keep monetary policy settings sufficiently tight until a sustained downtrend in inflation becomes fully evident and inflation expectations are firmly anchored” and that “guided by incoming data, the BSP remains prepared to resume monetary policy tightening as necessary to steer inflation towards a target-consistent path, in line with its price stability mandate.”
Unlike the purely qualitative forward guidance, foreign central banks would often use state-contingent forward guidance which has specific conditions that should happen before any monetary policy action will take place such as when the inflation rate hits a certain level.
Time-contingent forward guidance, on the other hand, makes use of predetermined dates before adjusting monetary policy settings. This policy guidance approach would take actions in doses as per the announced time period.
Remolona became the BSP's seventh governor in July this year. He has a fixed six-year term. Before his appointment, he was Monetary Board member for a year.
So far, he has been more readily transparent in his forward guidance compared to previous BSP chiefs, and he has consistently signaled -- not just hinted -- of his hawkish monetary policy stance. His forward guidance is not just on inflation and interest rates, but also covers the exchange rate.
The BSP is set to hold its eighth and last Monetary Board policy meeting for 2023 on Thursday, Dec. 14.
The market expects the BSP to keep the key rate unchanged at 6.5 percent after an off-cycle rate hike last Oct. 26 to bring inflation expectations back to the target range.