A risk conscious pause for monetary policy?

A rate cut may be misinterpreted, not as support for growth, but as a reaction to worsening political conditions or an attempt to mask deeper structural issues.

- DIWA C. GUINIGUNDO

The Bangko Sentral ng Pilipinas (BSP) finds itself at a delicate juncture as 2025 draws to a close. Inflation has slowed dramatically, settling at an average of 1.6% for the first 11 months of the year. Core inflation has remained contained at 2.4%. The latest inflation projections continue to paint a benign picture over the next two years as they remain broadly aligned with the midpoint of the target range of 2-4%.

By most monetary policy norms, this environment should justify further monetary accommodation. With consumer price pressures muted, inflation expectations stable, and output presumably below potential, conventional monetary policy thinking would suggest another reduction in the BSP's policy rate. Indeed, we expect the Monetary Board to have considered and announced by this time a 25-basis point cut in the BSP's policy rate, arguing that the manageable inflation environment provides scope for further easing to support domestic demand and talk up market confidence.

But monetary policy never operates in a vacuum. Policy choices must not only respond to inflation and growth dynamics but also to the broader ecosystem of political credibility, institutional trust, and social expectations. These intangible factors - confidence in governance, perceptions of corruption, and public belief in the rule of law can amplify or neutralize the effects of interest rate adjustments. Overlooking them risks misjudging how markets, investors, and the public will interpret monetary decisions.

Thus, while the data supports continued accommodation, the current political and macroeconomic landscape argues for something different: a risk-conscious pause, one that maintains an easy monetary posture but signals to the market that the BSP is alert to political noise, governance issues, and their impact on economic confidence.

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