1 - 4 - Bangko Sentral NG Pilipinas

Overview of Financial Markets and Institutions
Part 4: Bangko Sentral ng Pilipinas

References
• Contents from Bangko Sentral ng Pilipinas
• Additional contents provided by Tereynz Paul Mendoza
©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

All rights reserved. Any unauthorized copying, alteration, distribution transmission, display, or other use of this material is prohibited.
Contents
1.4 Bangko Sentral ng Pilipinas
1.4.1 Bangko Sentral ng Pilipinas’ objectives, functions, and framework
1.4.2 Monetary policy instruments
1.4.3 BSP latest performance

BSP in the News

Bangko Sentral ng Pilipinas
Ø The Bangko Sentral ng Pilipinas (BSP) is the central bank of the Republic of the Philippines.
Ø It was established on 3 July 1993 pursuant to the provisions of the 1987 Philippine Constitution and the
New Central Bank Act of 1993.
Ø The BSP took over from Central Bank of Philippines, which was established on 3 January 1949, as the
country’s central monetary authority.
Ø The BSP enjoys fiscal and administrative autonomy from the National Government in the pursuit of its
mandated responsibilities.
Ø In theory, all central banks must have an autonomy from national governments so that monetary
policies may not be influenced by politicians (e.g., printing lots of money without regard to inflation à
Zimbabwe)
Ø However, sometimes, politicians “push” central banks to issue monetary policies in their favor
(especially in times of national elections).

Case: Political Pressure on Central Banks
Binder* (2018) performed a study on the political pressures faced by 118 central banks. Based on her study,
Ø About 10% of central banks reportedly face political pressure in an average year, and 39% do so at some
point in the time sample (2010-2018).
Ø The pressure is almost always for easier (expansionary) monetary policy.
Ø Political interference with central banks is a global phenomenon, occurring in all regions and in both
developing and developed economies.
Ø Political pressure is more likely to come from governments with left-wing or nationalist executives, few
checks and balances, or weak electoral competition.
Ø Even central banks with high de jure central bank independence are susceptible to government pressure.
Consequently,
Ø Political pressure is associated with high average inflation over the time period.
Ø Political pressure may also erode central bank credibility, as it is also associated with higher inflation
persistence.
*Binder, C. (2018). Political Pressure on Central Banks. Available at SSRN: https://ssrn.com/abstract=3244148

Vision and Mission
Ø Vision
Ø The BSP aims to be recognized globally as the monetary authority and primary
financial system supervisor that supports a strong economy and promotes a high
quality of life for all Filipinos.
Ø Mission
Ø To promote and maintain price stability, a strong financial system, and a safe and
efficient payments and settlements system conducive to a sustainable and inclusive
growth of the economy.

Structure of the BSP
*Images obtained from the Bangko Sentral ng Pilipinas website

Mandates, Functions & Responsibilities
The BSP's main responsibility is to formulate and implement policy in the areas of money, banking and credit
with the primary objective of preserving price stability.
Ø Price stability refers to a condition of low and stable inflation. By keeping price stable, the BSP helps ensure
strong and sustainable economic growth and better living standards.
If inflation is too high (e.g., hyperinflation), If inflation is too low (e.g., deflationary),
Ø Cost of living becomes more and more expensive Ø Although cost of living becomes cheaper,
Ø In theory, if cost of living becomes more expensive, consumers may defer spending in anticipation of
workers will ask for higher wages. lower prices in the future.
Ø Given limited funds of companies, they are Ø As such, companies lose sales, which could lead
forced to layoff workers. to layoffs.
Ø There are other negative effects, such as currency Ø There are other negative effects in a deflationary
depreciation spiral as well, such as negative economic growth.
Although wages can be adjusted for changes in inflation to preserve employees’ purchasing power, this is not
easily implemented following the sticky wage theory.

Mandates, Functions & Responsibilities
Other BSP functions include:
Liquidity Management Management of Foreign Currency Reserves

Ø formulates and implements monetary policy aimed Ø maintain sufficient international reserves to meet
at influencing money supply any foreseeable net demands for foreign
currencies
Issuance of Currency
Ø exclusive power to issue the national currency Determination of Exchange Rate Policy
Ø determines the exchange rate policy of the
Lender of Last Resort Philippines
Ø extends discounts, loans and advances to banking
institutions
Other Activities
Ø functions as the banker, financial advisor and
Supervision of Financial Institutions
official depository of the Government, its political
Ø supervises banks and exercises regulatory powers
subdivisions and instrumentalities and
over non-bank financial institutions performing
government- owned and -controlled corporations
quasi-banking functions
Inflation Targeting Framework
Again, the main objective of the BSP is to achieve a
low and stable inflation.
The Inflation Targeting Framework entails the

announcement of an explicit inflation target that
the BSP promises to achieve over a given time
period.
Ø The current target for 2019-2022 is 3 percent ± 1
percent.
Ø The target serves as a guide for the public's
expectations about future inflation, allowing them
to plan with greater certainty.
The image (obtained from BSP website) on the right

shows the BSP’s process for inflation targeting.

Case: Inflation vs. Bitcoin
Fundamentals-wise, one of the reasons why we saw a huge increase in the price of Bitcoin was the belief that it
can be used as hedge for inflation.
Some investors believe that similar to gold, it can be used as a store of value because it has a limited supply and
cannot be controlled or intervened by governments, unlike traditional currencies.
The recent correction in the price of Bitcoin was [partially] attributed to the following news:

Case: Inflation vs. Bitcoin
The reason why the US Fed projects interest rate to rise in the future is because the US economy is currently
“heating up.”
Ø The economic response of the US government to recover quickly from the recession, such as the use of
stimulus checks, was successful but resulted in inflationary pressures.
Ø Although the Fed promised to keep the interest rates low, it projects that it will have to increase interest rates to
hamper inflation.
An increase in interest rates would drive investors to take advantage of fixed-income securities.
Ø Slightly lower return, but significantly lower risk compared to equities, cryptocurrencies.
Ø This is one of the reasons why we saw a correction in the US equity markets as well.
However, economists believe that Bitcoin cannot be considered as a store of value yet, since an asset with such
characteristic do not just lose more than 20% of its value in one day.
Ø Economists and investors argue that volatility may be reduced once everyone accepts Bitcoin.

Monetary Policy
Recall that the primary objective of the BSP's monetary policy is to promote a low and stable inflation conducive
to a balanced and sustainable economic growth.
Ø As such, the BSP performs “inflation targeting,” which is the bank’s way of conducting monetary policy to
achieve its primary objective of price stability.
There are two types of monetary policies:

1. Expansionary Monetary Policy
2. Contractionary Monetary Policy

Expansionary Monetary Policy
Under both policies, it is first assumed that money demand is constant (given that households and businesses
determine money demand = exogenous variable).
Interest
Rate Ø Under an expansionary monetary policy,
the monetary base is increased, which
leads to a decrease in interest rates.
i1
Ø Given that it is now cheaper to borrow, there
will be more economic activity coming from
i2 households and businesses, which
increases the price of goods.
Money
Demand
Quantity of
MS1 MS2
Money
Contractionary Monetary Policy
The opposite happens during a contractionary monetary policy.
Interest
Rate Ø Under an contractionary monetary policy,
the monetary base is decreased, which
leads to an increase in interest rates.
i2
Ø Given that it is now more expensive to
borrow, there will be less economic activity
i1 coming from households and businesses,
which decreases the price of goods.
Money
Demand
Quantity of
MS2 MS1
Money
Monetary Operations
Monetary operations refer to the implementation of monetary policy.
Overnight Reverse Repurchase Facility Issuance of BSP Securities

Ø In a repurchase transaction, the BSP buys government Ø BSP can issue its own debt security to eligible
securities (GS) from a bank with a commitment to sell counterparties.
them back at a specified future date at a predetermined Ø The purchase of BSP debt securities by the eligible
rate, resulting in an expansionary effect on liquidity. counterparties results in a contractionary effect on
Ø Conversely, in a reverse repurchase (RRP) operation, liquidity, while its redemption results in an expansionary
the BSP also acts as the seller of GS and the bank’s effect.
payment to the BSP has a contractionary effect on
liquidity.
Term Deposit Facility Standing Liquidity Facilities

Ø Banks and non-banks with quasi-banking functions may Ø The BSP offers standing liquidity (lending and deposit)
deposit their excess liquidity to the BSP with 7-, 14-, and windows that help counterparties adjust their liquidity
28-day tenors. positions at the end of the day.
Ø The act of deposit results in a contractionary effect, while Ø The act of borrowing from BSP results in an
the act of withdrawal results in an expansionary effect. expansionary effect, while the act of deposit results in a
contractionary effect.
Monetary Operations
The table below summarizes what the BSP should do if it wants to achieve an expansion or a contraction of the
country’s monetary base.
Monetary Operation/Tool Expansionary Policy Contractionary Policy

Reduce Increase
Overnight reverse repurchase rate (discourages banks to avail (encourages banks to avail
the facility) the facility)
Overnight deposit facility Discourage deposit Encourage deposit
Rediscount rate on loans Decrease Increase
Banks’ reserve requirements Decrease Increase
BSP holdings of government securities Outright purchase Outright sale

Problems in Conducting Monetary Policies
In the economic literature, there are different types of lags involved in the implementation of fiscal and
monetary policies.
Ø Inside lag: the amount of time it takes for a government or a central bank to respond to a shock in the
economy
Ø Outside lag: the amount of time before an action by a government or a central bank affects an economy
Monetary policies have shorter inside lags and longer outside lags, while fiscal policies have longer inside
lags and shorter outside lags.
Ø There are shorter inside lags in monetary policies compared to fiscal policies since there is less politicking
involved. However, the effects of monetary policies take some time before they are reflected in the markets.
Ø On the other hand, fiscal policies have longer inside lags because of legislation procedures and some
politicking. However, once a legislation is passed, the effects of fiscal policies are almost immediately felt by
their target (e.g., households).

Problems in Conducting Monetary Policies
Another problem involving monetary policies is concerned with their effectivity.
Lowering interest rates or increasing the monetary base are attempts to stimulate demand. However, they
may not work if there are:
Ø Problems in consumer confidence
Ø High unemployment
Ø High debt levels among households and businesses

BSP Measures during COVID-19 Pandemic

BSP Measures during COVID-19 Pandemic

Case: Inflation Rate in PH, JP
Historical inflation rate in the Philippines Historical inflation rate in Japan
(1986-2021) (1958-2021)


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Overview of Financial Markets and Institutions

Part 4: Bangko Sentral ng Pilipinas

• Additional contents provided by Tereynz Paul Mendoza

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

*Binder, C. (2018). Political Pressure on Central Banks. Available at SSRN: https://ssrn.com/abstract=3244148

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

*Images obtained from the Bangko Sentral ng Pilipinas website

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

Liquidity Management Management of Foreign Currency Reserves

The Inflation Targeting Framework entails the

The image (obtained from BSP website) on the right

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

There are two types of monetary policies:

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

Overnight Reverse Repurchase Facility Issuance of BSP Securities

Term Deposit Facility Standing Liquidity Facilities

Monetary Operation/Tool Expansionary Policy Contractionary Policy

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

©2021 Bangko Sentral ng Pilipinas. ©2021 Tereynz Paul Mendoza.

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