Economy ‘hot’, not overheating

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The economy may be running hot but it is not overheating thanks to continued tending by monetary authorities, the chief of the Bangko Sentral ng Pilipinas (BSP) said on Wednesday.

“I can tell you that [the]BSP spends a lot of time understanding the economy at any given point of time, developing a dynamic game plan and executing effectively. So the economy doesn’t overheat!,” central bank Governor Nestor Espenilla Jr. said in a message to reporters.

Last month, the International Monetary Fund warned that a combination of high credit growth, buoyant private investment and fiscal expansion without tax reform could lead to overheating of the economy.

Addressing the concern, Espenilla explained that overheating happens when present demands significantly exceed the economy’s capacity to provide.


“[It’s] easy to say but always hard to discern since our economy is complex with many moving parts,” said, adding that “the economic machine itself is constantly being improved through good investments. And it is subjected to outside shocks as well.”

One cannot jump to a conclusion just by looking at one or two bits of information, Espenilla continued.

“We have to strategically examine a whole lot of information to tell us how the overall economy is doing and, no less important, how should we respond if at all,” he said.

The Bangko Sentral, Espenilla explained, does this every six weeks by formally reviewing its monetary policy stance via a two-stage process.

Stage one utilizes the combined analytical power of central bank units ranging from Economic Research, Market Operations, Supervision and Payments.

“The formal management discussion, to firm up an evaluation and recommendation to the MB (Monetary Board), takes about three hours. But those three hours are backed up by hundreds of man-hours of focused research,” Espenilla said.

The Monetary Board meeting proper is stage two and comprises three hours of intense review before a decision to act or hold steady is made.

“That’s not all. The policy toolkit of BSP is not just monetary policy. Don’t forget its considerable supervisory powers over the banking and financial system to prevent imprudent and reckless behaviors in individual entities and sectors that lead to unsustainable risk build-ups,” Espenilla said.

“That grinds on relentlessly. As I say, it’s wrong to view the same way as 10 years ago how the financial system responds to risks and opportunities. It will be like looking at a child that never grows up or learns anything.”

Strategic long-term financial sector reforms covering the domestic capital market, foreign exchange market, payment systems, financial inclusion and literacy are also all aimed at making the overall financial system function efficiently, resiliently and responsibly, he said.

The Bangko Sentral, Espenilla stressed, is focused and determined to pursue important reforms.

“Finally, my race car analogy. We are working hard to run our economy competitively so it finishes a winner. We are talking careful preparation, regular tune-ups and upgrades, skillful driving, and constant monitoring,” the Bangko Sentral chief said.

“The engine is expected to get hot along the way. That’s what running engines do. But there’s a huge difference between a hot engine and an overheated engine. If we don’t like hot engines, we should keep our car parked.”

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