PRESENTATION OF CONTENT

The Central Bank and the Monetary Policy

MONETARY POLICY
 It refers to the actions undertaken by a nation's central bank to control money supply and
achieve macroeconomic goals that promote sustainable economic growth. (Investopedia)
 It is a process whereby the monetary authority attempts to achieve a desired set of economic goals by
controlling money supply, cost and availability of credit or the allocation of credit to its various uses
(Boughton)
 It is the process of drafting, announcing, and implementing the plan of actions taken by the central
bank, currency board, or other competent monetary authority of a country that controls the quantity of money
in an economy and the channels by which new money is supplied.
 A sound monetary policy should be flexible and dynamic. It should be conducive to the changing needs and
problems of the economy. But above all, it should promote not only the economic growth of the country but
also the social justice of the credit system.

BSP’s Monetary Policy

 Its primary objective is “to promote price stability conducive to a balanced and sustainable growth of the
economy” (Republic Act 7653). The adoption of inflation targeting framework of monetary policy in January
2002 is aimed at achieving this objective.

Inflation Targeting
 It is focused mainly on achieving a low and stable inflation, supportive of the economy’s growth
objective.
 It entails the announcement of an explicit inflation target that the BSP promises to achieve over a given
time period.
 To achieve the inflation target, the BSP uses a suite of monetary policy instruments in implementing the
desired monetary policy stance, depending on its assessment of the outlook for inflation.
 If the BSP perceives the inflation forecast to exceed the target, then it implements contractionary
monetary policy to bring down inflation to its target path.
 On the other hand, if the BSP sees the inflation forecast to be lower than the target or there is need to
increase liquidity in the financial system, then it can implement expansionary monetary policy.
 The reverse repurchase (RRP) or borrowing rate is the BSP’s primary monetary policy instrument.

Open Market Operations

 Raising or lowering the overnight RRP rate (policy rate) or rate at which BSP borrows from banks and
eligible financial institutions using its holdings of government securities as collateral
 Issuance of BSP securities to absorb excess liquidity from the financial system by locking funds in
longer-term monetary instruments
 Outright sale or purchase of government securities

Acceptance of Term Deposits

 Offering term deposits to absorb liquidity

Standing Liquidity Facilities

 Offering standing liquidity (deposit and lending) windows to absorb or provide liquidity at the initiative
of the counterparty
 Other Liquidity Management Facilities
 Increasing/decreasing the reserve requirement or the percentage of bank deposits and deposit substitute
liabilities that banks must set aside in deposits with the BSP which they cannot lend out, or where
available through reserve-eligible government securities
 Adjusting the rediscount rate on loans extended to financial institutions on a short-term basis against
eligible collateral of banks' borrowers

Central Bank of the Philippines

 It is responsible for executing the monetary policy; gives
primary and immediate importance to the maintenance of
monetary stability.
 In view of the financial crisis which the country has been
experiencing for some years, the policy of the central bank
is to stress domestic financial mobilization. Thus, there is a
need for bringing more about prudent banking and greater
safety for funds of depositing public. In this connection,
bank consolidation or merger is being encouraged by the
central bank. The Central bank believes that big banks are
more efficient and stable.
 Without the cooperation and support of fiscal policies
(taxation, government borrowings and government
expenditures), monetary goals like economic growth and
monetary stability are difficult to attain. For instance, in
controlling inflation or excess liquidity, the monetary tools
are useless if top government officials are extravagant in
funding their projects.
 A key role of central banks is to conduct monetary
policy to achieve price stability (low and stable inflation)
and to help manage economic fluctuations. Central
banks conduct monetary policy by adjusting the supply of
money, generally through open market operations.

For additional references, you may visit the following links:

1. https://www.bsp.gov.ph/Media_And_Research/Learning%20Materials/Q32019.pdf
2. https://www.bsp.gov.ph/Price%20Stability/targeting.pdf