The Bangko Sentral ng Pilipinas' (BSP) restrictive, less aggressive and gradual monetary policy easing is the correct route especially since the BSP also intends to bring banks’ reserve requirements even lower over time, according to GlobalSource Partners country analyst, Diwa C. Guinigundo.

In his latest assessment, Guinigundo, a former BSP deputy governor for the monetary and economics sector, said that considering the risks to the inflation outlook, “it would be risky for the BSP to be too aggressive in its easing policy.”

“Most important, and this is our view, there is less compulsion for the BSP to be more aggressive in easing monetary policy through the policy rates precisely because it has also been pumping more liquidity into the system by its significant reduction in the required reserve ratio (RRR),” he added.

The BSP further cut the RRR by 250 basis points (bps) from 9.5 percent to seven percent for big banks last October 2024 and “effectively infusing the market with hundreds of billions of extra money supply.”

Guinigundo said that while the inflation rate is expected to settle within the government target range of two percent to four percent in the next two years, the economists’ mean inflation projection was at 3.1 percent versus the BSP’s risk- adjusted inflation estimate of 3.4 percent for 2025.

“That disparity derives from the fact that the forecasters submitted only their baseline scenarios which exclude the risk of elevated global oil prices beyond $90 per barrel and the second-round effects on transport fares, food prices and wage adjustments,” he explained. This difference indicates that it will not be a good move for the BSP to be too aggressive in its easing policy.

“It is correct though for monetary authority to have declared that monetary policy remains in the restrictive territory. But what is happening is hardly the best moment for impassioned monetary policy,” said Guinigundo, adding that economists surveyed by the BSP has also recognized the risks to inflation such as possible supply disruptions because of geopolitical hostilities, bad weather and power rate hikes.

He also noted that the economists’ baseline scenarios may not have included the US trade policy shifts under the Trump administration.

The former BSP official said the US government’s higher tariff policy against Canada and Mexico -- who will retaliate -- will have an impact of inflation. He cited as well other issues that will affect inflation such as the lower taxes for big business and the deportation of immigrants with their lower wages.

“Possible spillover effects should be anticipated and managed to ensure inflation is kept at bay in the Philippines,” Guinigundo added.

For this year, Guinigundo said that the earlier pronouncement of BSP Governor Eli M. Remolona Jr. of possibly cutting the key rate by 50 bps for the entire 2024 will be implemented in two installments -- one in the first half, and the other in the second half of 25 bps each.

“A hundred basis point cut was cited as too much because the country is far from a hard landing,” he said. Last year, the economy only grew by 5.6 percent, way below the government target of six percent to 6.5 percent.

Guinigundo said with BSP’s move to further reduce the RRR this year, there will be less reason to be aggressive in monetary policy easing.

“This strand of monetary policy should address the cost and profit consideration of banks because it reduces their opportunity loss. Instead of their deposits sitting idly without interest at the BSP, the BSP effectively gives it back to the banks and in the process increases their loanable funds. With the BSP’s policy rates down, banks have no excuse not to adjust both their high lending and low deposit rates,” he said.

The BSP’s Monetary Board will meet on Thursday, Feb. 13, for its first policy rate meeting for the year. In 2024, the BSP cut the key rate by a cumulative 75 bps to 5.75 percent amid a decelerating inflation environment.