It's a privilege to be part of this FINEX Seminar, your 58th Seminar. And this looks like a friendly crowd, so I'm very happy to be part of this.
So at the BSP [Bangko Sentral ng Pilipinas], as you know, our primary mandate is price stability. It's a good mandate because we found out empirically, actually, price stability is good for growth. In fact, it's good for sustained growth. So it's a mandate we believe in, and it's a mandate we try to fulfill.
And monetary policy is about achieving that mandate.
Monetary policy means dealing with so many moving parts of the economy. So, I will try to simplify things, but you're free to ask me about the complicated parts of monetary policy.
It also turns out, by the way, that if you do a survey of well-being among the poorest segments of our society, the number one indicator of well-being is low inflation. So it works in practice and it works in the minds of our citizens.
Let me tell you what's happened to inflation in the last five years.
There was a big surge in inflation after the start of the war in Ukraine in February [2026]. That raised oil prices, but it also raised food prices because our food is produced in part through fertilizer that is a byproduct of oil.
The yellow part is the direct consequence of high oil prices. It affects transport prices and it affects energy in general.
And then blue is the effect on food prices, especially rice.
And then the kind of orange shade is core inflation. And core inflation is subject to the second round effects of the rise in oil prices.
So in 2022, you had the Ukraine shock. You see the surge in prices, in inflation, by the way.
And then in March of 2026, you had the Hormuz shock. And you see the same thing. You see a surge in energy prices and then you see a surge in food prices. And then you see the second round effects.
So these have been challenging years. So what did we do?
Let me tell you something that's very unusual about what happened last March.
As you know, with the closure of the Strait of Hormuz, the price of oil went up. That's shown in green. So, we used Brent futures to measure that.
But something unusual also happened. The [US] dollar became much stronger than before. That's shown by the blue line.
We measured the strength of the dollar in terms of the XY. So that's the index of the dollar against the Euro, against the British pound, against the Swiss franc, the Japanese yen. So six of the major currencies.
And something very unusual happened. The price of oil goes up, the dollar strengthens. Usually it's the opposite. When the price of oil goes up, the dollar weakens. But in March, the dollar strengthened. So that's what we call a double whammy.
Because in terms of the exchange rate of the [Philippine] peso to the dollar, the peso weakened. So that's red. So when red goes up, that means weaker peso. When blue goes up, that means stronger dollar. And then of course oil is green.
That was one month. But that had a lot of effect on inflation.
And then of course there was further volatility since then. But the big event was in March 2026.
So with monetary policy, we work mainly with the policy rate, which is an overnight rate. But with communication, what we call forward guidance, it affects the whole yield curve.
And it affects investment. It affects the demand for investment. And it affects demand for consumption through interest rates. Sometimes it's very hard to understand.
In fact, this diagram is represented by about 88 equations in our model. Because there are so many moving parts.
In the old days, because you guys look so young, you don't know the old days, we used to do it by controlling money supply.
So when you want to lower inflation, you tighten money supply, you reduce money supply. But in the 1990s, we found out that it works the same way if you raise interest rates. Tightening money supply is the same as raising interest rates.
Except that working through interest rates is much more reliable, much more effective. So we do it now through interest rates. And that's based on a deeper understanding of how the economy works.
So we've been raising interest rates, as you might imagine. We've raised interest rates this year three times, 25 basis points each.
And in raising interest rates, we don't just look at what's happening to inflation. We also look at other things. We try to be forward-looking.
So when we do monetary policy, we discuss different scenarios. Will the price of oil go up again? And these days, the scenario that we care about the most is El Niño. There's a regular El Nino, a kind of benign El Niño, which is bad news. But there's a bad El Niño, which is really, really bad news.
So we have to worry about both scenarios and decide on monetary policy based on that.
We also now worry about inflation expectations more than before. It turns out that when things are very uncertain, expectations matter.
We look at your expectations. We do a survey of you guys, market analysts. We do a survey of households, and we do a survey of firms.
Now, as long as the BSP is credible, you'll have expectations that look like the blue line. So 12 months ahead, the expectation is 5.3 percent inflation. 24 months ahead, 4 percent inflation. And then 36 months ahead, 3.3 percent inflation.
The reassuring thing is expectations are going, are moving towards our target of 3 percent.
What we worry about is expectations that look like the red line. They don't seem anchored enough. And it makes our life much more difficult when expectations are not well anchored.
By the way, 3 percent is our target for inflation. That, we figured out, is the sweet spot for a growing economy like ours. Other central banks, the US has a 2 percent target. Other developed countries have 2 percent targets. We're among the group with 3 percent target.
So we worry about expectations. We worry about scenarios.
And then we decide. And as I said, so far this year, we've raised the policy rate a total of 75 basis points. So three times, 25 basis points at a time.
Let me just say one more thing about monetary policy. It's far too easy for us to just please the crowd. The crowd seems to want low interest rates, strong peso, and low inflation.
But we have to do the right thing for the economy. And so, we won't be able to make you guys happy all the time. And that's why we have independence.
Because we have to do the unpopular stuff.
So that's my presentation. I kept it short.
Thank you. Maraming salamat.