A risk-conscious pause for monetary policy?

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.

NOT THE WHOLE STORY
To appreciate why a pause is prudent, it is useful to revisit the inflation picture in detail. Inflation has not only come down — it has stabilized. Monthly inflation held at 1.7% in both October and November, reflecting easing prices of rice, vegetables, and meat. Even as electricity rates rose on higher generation costs, the effect was not enough to alter the disinflation trend. This is very positive.

Core inflation also softened slightly, falling from 2.6% in September to 2.4% in November. Official price statistics show that services inflation declined due to lower transport fares and rentals, while core goods inflation eased with slower gains in key food items. But there are some pockets of risks — near-term power and other utilities adjustments, the impact of rice import policies, and rising fuel prices — but these generally remain manageable and well-anticipated.

Indeed, this benign picture provides the BSP with valuable policy room. But abundant room is not identical to the imperative to move. In fact, policy space can be used more effectively when held in reserve, particularly dur-ing uncertain, more challenging times.

GROWTH IS SLOWING
The economy’s real sector is losing steam. GDP growth slipped to 5% in the first three quarters, below the government’s 5.5% to 6.5% target. In past press statements, the BSP has projected sustained weakness in growth even for the last quarter of 2025. Employment indicators have weakened; unemployment rose from 3.8% in September to 5% in October, and underemployment climbed to 12%.

Purchasing Managers Index (PMI) data tells a story of fragile momentum. While October’s PMI at 51 suggests mild expansion, it follows months of contraction from July to September. The services and construction sectors remain vulnerable to investment hesitancy. Even if credit conditions remain conducive — with the loan-to-deposit ratio improving to 77.3% — banks cannot lend into sentiment-driven weakness.

Under normal circumstances, such softness would justify a rate cut. But today’s weakness is intertwined with broader, non-economic anxieties. It stems from concerns over corruption scandals, governance uncertainty, and the per-sistent perception that policy direction is unclear and subject to political headwinds rather than sound planning. These issues disproportionately erode business confidence, which in turn dampens investment decisions regardless of where interest rates sit.

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

FUNDAMENTALS MEET SENTIMENT
The peso’s weakness` this year shows how political uncertainties can magnify economic vulnerabilities. While the currency’s recent depreciation beyond P59 to a dollar partly reflects fundamentals such as our large current account deficits, portfolio outflows, and a decline in foreign exchange reserves, it could also mirror declining investor sentiment.

The latest business surveys reflect muted expectations. International financial institutions have downgraded growth forecasts. Markets are factoring in governance concerns, including allegations of corruption in pricey pub-lic infrastructure (read flood control projects) and procurement projects. These concerns feed into investment hesitation, capital outflows, and weaker portfolio inflows.

Under such conditions, a rate cut risks reinforcing the depreciation trend. Investors may not interpret it as economic support but as an indication that monetary policy is willing to accommodate the dictates of economic growth or downplay risks to currency and financial stability.

The BSP’s consistent stance, that exchange rate participation is limited to smoothing excessive volatility rather than defending levels, is both sound and credible. But credibility is sustained not only through communication but also through policy choices that align with broad market expectations of prudence.

EXTRA VIGILANT MONETARY POLICY
The challenge today is not inflation; it is confidence. And confidence is deeply tied to governance.

Corruption scandals erode trust in public institutions and send adverse signals to investors about the predictability of policy. They create doubts about the quality of fiscal spending, particularly on large public infrastructure programs. They raise concerns about leakage, inefficiencies, and misaligned incentives that can diminish the effectiveness of government outlays. Fiscal consolidation becomes more of a slogan than policy.

A high level of perceived corruption does not only distort resource allocation; it also alters the psychological environment in which businesses operate. Investors worry that contracts may not be honored, regulations may shift without due process, and political priorities may override economic rationale. These risks elevate the hurdle rate for investment, which monetary easing alone cannot overcome.

Monetary policy must therefore adjust by being especially careful not to unintentionally worsen sentiment. A rate cut in the middle of political turbulence could be read as reactive. A pause, on the other hand, signals stead-iness — a message that the central bank remains insulated from political noise and committed to its mandate of stability.

CREDIBLE AND STRATEGIC PAUSE
In our decades of engagement with public policy, we found that a pause does not alter the accommodative stance of monetary policy. Real interest rates remain low, liquidity is expanding, and the banking sector is well-positioned to support credit demand. What a pause does is provide clarity.

A pause affirms that the BSP recognizes political and governance risks. It assures the market that the central bank will not expend its precious ammunition before it is absolutely necessary. It reinforces the credibility of the BSP’s data-driven and independent decision making. Finally, a pause keeps monetary space available should global conditions deteriorate abruptly.

Credibility is not built through bold moves alone. Sometimes it is strengthened by restraint.

FISCAL REALISM NEEDED
Monetary policy also cannot ignore the fiscal environment. The National Government’s debt-to-GDP ratio now exceeds 63%. Revenue-to-GDP remains at 16% to 17% while expenditures hover at 22% to 23%. Fiscal consolida-tion remains a challenge and requires structural reforms that monetary policy cannot substitute for.

A rate cut risks signaling to markets that monetary policy is being used to compensate for fiscal underperformance or political uncertainty. This is a slippery slope. The BSP must avoid even the appearance of such a calibration.

In a period marked by softening growth, benign inflation, and political noise, one may consider a policy response that is not mechanical easing but thoughtful accommodation anchored in risk awareness.

A strategic pause preserves the benefits of an easy monetary stance while avoiding the pitfalls of signaling concern or political alignment. It shows investors and the public that the BSP is focused on stability — even when the broader political environment seems distracted by scandal and uncertainty. It communicates that the central bank understands both the numbers and the narrative that shapes market behavior.

In short, a pause is not a retreat; it is a reasoned assertion of credibility at a time when credibility itself is under strain. It allows the BSP to support the economy without compromising its institutional integrity or worsening the very confidence challenges that currently hamper economic growth.

At this point, what the Philippines needs is not just accommodation — it needs risk-conscious, credibility-enhancing accommodation. And that is best achieved by staying the course, holding steady, and keeping policy flexi-ble enough to respond when true necessity demands action.

Diwa C. Guinigundo is the former deputy governor for the Monetary and Economics Sector, the Bangko Sentral ng Pilipinas (BSP). He served the BSP for 41 years. In 2001-2003, he was alternate executive director at the International Monetary Fund in Washington, DC. He is the senior pastor of the Fullness of Christ International Ministries in Mandaluyong.