A former deputy governor of the Bangko Sentral ng Pilipinas (BSP) has issued a stark warning that further interest rate cuts may be reaching their limit in stimulating the Philippine economy. Diwa Guinigundo, now an economist with GlobalSource Partners, argues that without significant structural reforms from the government, monetary easing risks passing the point of diminishing returns.
Guinigundo's comments follow the BSP's latest decision to cut its benchmark interest rate by 25 basis points to 4.25%, a move justified by slowing growth and manageable inflation. However, he suggested that pausing further cuts "could have been more circumspect," noting that previous reductions have failed to generate faster economic momentum.
"Consumption spending remains subdued, business sentiment is weak, and investment activity is uneven," Guinigundo observed.
A particularly concerning sign, he pointed out, is that banks have actually tightened credit standards even as interest rates have fallen—the opposite of the intended effect. This indicates heightened risk aversion and uncertainty about near-term economic prospects.
"This dynamic underscores a central reality," Guinigundo said. "Monetary policy cannot compel risk-taking or override structural constraints, such as logistics inefficiencies, regulatory uncertainty, and external vulnerabilities."
BSP Governor Eli Remolona Jr. has acknowledged these limitations, repeatedly urging fiscal agencies and other government departments to take more decisive action. While the central bank can influence money supply through tools like interest rates and reserve requirements, it cannot address deeper issues that discourage lending and spending.
The diminished role of monetary policy was evident at a recent economic forum, where discussions focused instead on more fundamental challenges: persistent bureaucratic red tape, especially at local government levels; the urgent need to accelerate infrastructure development, particularly digital infrastructure; high and unreliable energy costs; and the necessity of expanding regional trade opportunities for small and medium enterprises.
While the government has taken some steps—including President Ferdinand Marcos Jr.'s push to fast-track infrastructure projects, the Anti-Red Tape Authority's actions against non-compliant local governments, and new energy policies aimed at increasing competition—experts agree more aggressive reforms are needed.
As the Philippines chairs ASEAN this year, it has an opportunity to advance trade discussions through agreements like the ASEAN Free Trade Agreement and Regional Comprehensive Economic Partnership. However, improving consumer and business confidence requires sustained, comprehensive efforts beyond monetary adjustments.
"There are no band-aid solutions," the analysis concludes, "and the work never ends."