Eli Remolona has spent his professional life in the world of central banking and international finance. When I first met him he had long completed his economics Ph.D. at Stanford University and gone on to work at the Federal Reserve Bank of New York where he was about to finish his 14-year stint there and move on to the BIS, the Bank of International Settlements, for another 19 years of service.
Fast forward. He has now been head of the Bangko Sentral ng Pilpinas for going on four years. He has led the economy through the post-Covid period dealing with inflation had to be vanquished, and transitioning from a period of aggressive rate hikes to a series of rate cuts price pressures finally eased.
Suddenly he and his team at the BSP have been hit with a crisis they did not create, could not have foreseen, and now must help the people and the economy navigate: the flood control corruption scandal where billions of pesos have been siphoned off from government projects illegally, hammering consumer and business confidence and causing the economy to grow at its slowest rate in four-and-a half years.
No surprise that when I caught up with Governor Remolona virtually at the BSP’s Central Bank Symposium this week to do an interview, the conversation turned to the impact the scandal is having on the economy and if it would necessitate another rate cut at its December meeting.
Eli did not beat around the monetary policy bush.
”There is a possibility of a cut. More like 25 basis points,” he said. “I think 50 is just, not something we…can see, because it’s, you know, <if> we do 50 if there’s a risk of a hard landing. And we don’t see that risk at all. So for now, we’re thinking about the possibility of a 25 basis point cut.”
In fact far from seeing an economy that needs a lot of stimulus to recover Governor Remolona sees a silver lining in the flood control scandal.
”I think…in the long run, this is a good thing. They’re changing the rules.: So I think…in the long run, this is a good thing. It’s going to make governance much better,” Eli adds. “And indeed, the markets recognize that. The markets have started to recover, and we think By 2026, growth will come back, and it will come back with a vengeance. So… maybe this is a good thing in the long run, Kathleen
So dive in and hear why Eli thinks the Philippines economy will have something that looks more V-shaped than flat, and fully recovered from the scandal impacts by the end of 2027. And dive into what he thinks of the papers presented at the symposium on inflation expectations, foreign exchange intervention, and small vs large bank depositor behaviors. Spoiler alert: he says he learned a lot and thinks they are great.
Expectations are different for various classes of actors 00:02:09.009
When it comes to inflation expectations, the most important thing, I think, is how well anchored the expectations are. And it depends on whom you ask. So the households, they’re backward-looking, so their experience of inflation is a big deal to them. So if they’ve had a bad experience, then their expectations tend to be not so well anchored. But businesses seem to be forward-looking. And they tend to have well anchored.
Inflation is very important to consumers’ sentiment 00:02:42.159
And fortunately, it’s the businesses that set prices, so the link is more direct between their expectations and actual price dynamics. So that’s a good news, I think. One of the important things that we discovered was the survey of well-being, because when we ask about inflation, we also ask about how they feel about themselves. And in general, the number one indicator of their well-being is, inflation. Number two is, corruption, and number three is growth. That wasn’t what we expected. So inflation is number one…when you think about it, they see indicators of inflation every day. They see the price of rice, they see the price of, of cooking gas, the price of transportation, so that’s what, what they see every day. So it makes sense. It makes sense.
The central bank has to communicate about things that matter 00:04:26.260
Yeah, so we were beginning to also talk about salient prices. So, when we communicate with the public. We have to make sure we talk about things that they understand. Inflation itself is very hard to understand. You know, people think in terms of levels of prices, rather than, changes in the levels of prices. So we have to talk about, you know, the price of rice, how much it is today, and the price of cooking gas, and the price of garlic, Kathleen. Garlic is very prominent in the minds of Filipino households. So we have to talk about those things. We have to talk about salient… salient prices in order to communicate.
Information is well spread even for small depositors 00:06:21.420
That’s right, that was <another> big surprise to us. We thought, the big depositors, who probably know the owners of the banks, would get the news first. But it turns out, everybody gets the news. There’s a kind of a market for, well, informal news, or a market for gossip, I think, that’s very active. and so, even the smallest depositor Learns when the bank is in trouble, and they go and withdraw their deposits. Just as fast as the big guys.
Deposit flight is a worry for banks 00:07:19.680
That’s part of that, how this works, of course, and the banks worry about how quickly deposits can, can be moved through, through digital means. And so it’s, yeah, it’s… things go in, very quickly now, this day, so we have to worry about that, we have to make sure there’s enough trust in banks. So that even the slightest loss of confidence, doesn’t happen.
The central bank has a delicate job when crisis threatens 00:08:00.260
Well, we… we have to do all the right things, but we also have to communicate, as you know. We have to continuously assure the public when we know that a bank is not in trouble. We don’t know yet what to do. If we do find that a bank is in trouble. But the first thing to do is make sure they don’t get into trouble.
Imported inflation is a threat again 00:09:29.150
As you know, our… mandate is price stability. Well, we do intervene, but only in certain situations. And then, when it comes to the exchange rate, there are episodes when the peso depreciates a lot. over a few weeks, and that’s what leads to something called the exchange rate pass-through. So, too much of a depreciation…tends to lead to inflation, so we’re…almost forced to intervene to minimize that pass-through. The pass-through is kind of interesting, because it was a big issue in the past. In the 80s, for example, it was a big issue. And now it’s come back to haunt us.
Oil priced in dollars calls for earlier action if the peso weakens 00:10:09.920
And now we, you know, because of the price of oil and the… and also the peso is more market-driven now. So we… When there’s enough of the… of a depreciation. Then we’re almost obliged to intervene. To minimize what’s called the pass-through. We don’t stop the peso from moving, we just try to slow it down.
Scandal shocked and surprised the Central Bank, hit consumer confidence 00:11:47.550
Well, we were as shocked as everybody else. The amounts involved were just beyond what we would have expected. But the markets, declined. There was some loss of investor confidence. There was a slowdown in investment, a slowdown in consumption, so that led to slower growth.
Government not letting “crisis go to waste;” in long run scandal “is a good thing”
But now the government seems to know that you don’t want to let a crisis go to waste. So the government has started to put in very strong measures. They’ve filed cases against the culprits. They’re changing the rules.: So I think…In the long run, this is a good thing. It’s going to make governance much better. And indeed, the markets recognize that. The markets have started to recover, and we think By 2026, growth will come back, and it will come back with a vengeance. So… Maybe this is a good thing in the long run, Kathleen.
A 25bp rate cut may be on the table but not 50 00:13:40.260
There is a possibility of a cut. More like 25 basis points, I think. 50 is just, not something we, we…We can see, because it’s, you know, we do 50 if there’s a risk of a hard landing. And we don’t see that risk at all. So for now, we’re thinking about the possibility of a 25 basis point cut.
No central bank remedy for supply disruptions 00:14:04.880
As you know… if the slowdown is… because of a weakness in demand then there’s something we can do <with monetary policy. But if it’s a problem of supply, then there’s very little we can do <with> this, kind of shock. …Or with a a big typhoon, <that> would damage crops.
Market fall-out from scandal has mostly hit stocks which are recovering 00:16:16.300
It has hit the exchange rates, but, most of the shock has been in the stock market. Most of the observed shock has been in the stock market, and the stock market is actually… started to recover. So we think by 2026, we should be… We should be okay. It’s kind of gonna be a V-shape…most of it… There’s gonna be some recovery by next year, by 2026, but by 2027, we should be back on track.
ELI M. REMOLONA, JR. Chairman of the Monetary Board and Governor Bangko Sentral ng Pilipinas Dr. Eli Remolona, Jr. is the seventh Governor of the BSP and Chairman of the Monetary Board. Governor Remolona has extensive policy and operational experience in monetary policy and international finance having worked for 19 years at the Bank for International Settlements and 14 years for the Federal Reserve Bank of New York. From 2019 to 2022, Governor Remolona served as professor of finance and director of central banking at the Asia School of Business in Kuala Lumpur. Additionally, he also taught at Williams College, Columbia University, New York University, and the University of the Philippines-School of Economics. Before his appointment to the Monetary Board in 2022, Governor Remolona served as an independent director of the Bank for Philippine Islands (BPI) and chairman of its risk management committee. He earned his PhD in Economics with distinction from Stanford University and obtained his bachelor’s degree in Economics with honors from the Ateneo de Manila University
