OECD tells Philippine central bank to improve monitoring, management of inflation expectations

THE BANGKO Sentral ng Pilipinas (BSP) should improve its monitoring and management of inflation expectations and enhance its monetary policy framework to effectively deal with the impact of supply shocks on prices and the broader economy, the Organisation for Economic Co‑operation and Development (OECD) said.

In its Economic Survey of the Philippines released last week, the OECD said the BSP could allow inflation to exceed its target temporarily if expectations remain well anchored to veer away from tightening its monetary policy amid a supply-driven economic slowdown.

“BSP could communicate that, while firmly remaining committed to price stability in the medium term, it will allow inflation to temporarily overshoot the target range following extreme weather events if expectations remain well anchored,” the OECD’s report read.

“In doing so, BSP could increase the focus of its communication on core inflation, in addition to headline inflation,” it added.   

Headline inflation quickened to a near one-year high of 2% in January, marking the first time in almost a year that the inflation print settled within the central bank’s 2%-4% target.

This was faster than the 1.8% clip seen in December but was slower than the 2.9% in the same month last year.

The BSP projects inflation to end the year at an average of 3.2%, before slowly easing to 3% in 2027.

The OECD noted that policy tightening amid elevated inflation due to supply shocks risks weakening domestic demand.

The central bank has been on an easing path since August 2024, having delivered a total of 200 basis points (bps) in cuts which brought the key policy rate down to 4.5%. 

In 2025, it trimmed the benchmark rate by 25 bps five consecutive times, with the last two meant to spur demand amid a sluggish economy due to the flood control corruption scandal.    

BSP Governor Eli M. Remolona, Jr. has repeatedly said that reducing borrowing costs amid a growth slump can only boost domestic demand, noting that monetary policy easing cannot be the economy’s defense against a supply-driven slowdown. 

“Given that supply conditions are outside the central banks’ control and that tightening monetary conditions to bring demand in line with temporarily lower supply can reduce output more than necessary, efficient management of inflation expectations is crucial to deal with supply shocks,” the OECD said.

The OECD likewise lauded the BSP’s inflation-targeting monetary policy framework, but noted that it must be well-equipped to address supply shocks in instances where non-monetary measures may be inefficient.   

“In these instances, the central bank needs to decide whether to allow the price spike to run its course or tighten its policy stance,” the OECD said. “Monetary policy cannot effectively counteract supply shocks, but repeated supply shocks nonetheless require central bank attention.”

It added that the central bank must enhance its business expectations survey (BES), consumer expectations survey (CES) and BSP survey of external forecasters (BSEF) to better capture inflation expectations that would guide its monetary policy path.   

BSP Deputy Governor Zeno Ronald R. Abenoja has said that they plan to roll out the monthly version of the BES by late first quarter or early second quarter, while the monthly CES will likely be launched in the second semester. 

Released quarterly, the CES analyzes consumers’ economic outlook to determine the country’s future economic conditions, while the BES gauges business sentiment and prospects. 

The CES usually surveys about 5,000 households in the Philippines through random sampling, while the BES draws a random sample from a list of the top 7,000 corporations ranked based on total assets in 2017 from the Bureau van Dijk database.

Meanwhile, the BSEF is a monthly survey featuring inflation forecasts for the current and following quarters, the current year, as well as the next year and two.

“The BSEF is available at a monthly frequency but mainly reflects the views of financial market participants and academic experts rather than the expectations of businesses and workers that are central to the price and wage-setting process,” the OECD said.

It also said all three surveys should provide an outlook for the next five years apart from the year-ahead forecast, which would “allow to distinguish the anchoring of inflation expectations more clearly from short-term inflation expectations.” — K.K.Chan