The older central banks are evolved private
institutions, which either developed into
INTRODUCTION:
Finance has become one of the most
international of industries, with major banks spreading
their activities across numerous countries and
continents, yet regulation still takes place on a national
or even more local basis. When banks run into trouble,
it's unclear who is supposed to help or how. The favored
solution so far, direct government intervention, like the
$700 billion rescue package approved by the U.S.
Congress or the British plan, isn't an option everywhere.
Banks have become so big and so leveraged that
their balance sheets can exceed the gross domestic
product of the country in which they are based. That's
the case in Belgium, the Netherlands and a host of
smaller coun-tries, including Iceland, where on Oct. 6 the
Prime Minister warned about the possibility of a
"national bankruptcy" because several banks with assets
larger than the country's entire economy ran into
trouble. Uncertainties about crisis management efforts
are contributing significantly to the market instability.
BODY:
The Confidence on Money
The BSP is the only authorized government
entity to print money and is responsible for the proper
administration of the monetary banking credit system of
the republic to achieve monetary stability and create
conditions conducive to economic development. As such,
it preserves the confidence of the people in money as a
thing of value and essential institution of the economic
system. Once the trust is broken, money ceases to
function as it should be, i.e., as a vehicle of economic
activities and pillar of the price system.
What are some instances of monetary
management by monetary authorities that can cause
people to lose confidence in money and what are the
probable effects?
One example is the unrestrained growth in
money supply which causes severe inflation and distorts
investments, production, and employment. In this case,
money tends to lose value and people prefer to tie up
with rapidly appreciating but non-productive assets in
real forms like jewelry and idle lands.
Holding on instead even to interest-earning
money simply allows inflation to erode its value. As a
result, less money is made available for investment,
production and employment to acquire non-productive
consumption spending.
Characteristics of a Central Bank
Central banks all over the world share a major
characteristics. The following are the most important.
1. Publicly-owned. There are varieties of
ownership patterns for central banks, but
government ownership is a common factor. The
Central Bank of the Philippines is fully owned
and controlled by the government. This is
likewise the case with many central banks
founded after the Second World War when many
countries became politically independent.
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publicly controlled banks or have retained their
private character. There are still a few examples
of central banks which are partly privately
owned, those in Belgium, Switzerland and Japan.
The Bank of England evolved from a private
profit-oriented bank. The U.S. central bank called
the Federal Reserve System as a "system of 12
regional federal reserve banks." The Federal
Reserve Banks are owned by private commercial
banks, which are members of the Federal
Reserve System. In spite of this, the U.S.
government exerts a large influence on the
system.
The members of the Boards of the Governors,
the central monetary authority for the country,
are appointed by the US government and in turn
this Board appoints the directors of the Federal
Reserve Banks. Based on this, the formal
structure of ownership need not affect the
essential operations of central banking and
monetary policy. What is important is that
central banks today operate for a public
purpose. They are not there to earn a profit.
2. Bank of currency issues and ultimate source
of money. All central banks perform the note
issue function for the country. The notes are
regulated in their supply by the government,
which may be represented by the monetary
authority or by the requirements of the budget.
In theory, however, the central bank can provide
all the money the government requires.
The Philippine Central Bank prints and mints the
coinage. More significant than the note issue
function is the central bank's role as the ultimate
provider of cash. This depends on the
willingness of the community to accept all notes
and checks drawn on the central bank. The
general public will accept such checks because
the commercial banks will credit the proceeds to
the depositor's account
3. Banker's Bank. The old central banks evolved
partly from the need for some institution to
become a bank for bankers. All central banks
perform this function of servicing other banks.
This includes such activities as maintaining
accounts for other commercial banks - in fact,
the other banks are required to do so, if only to
deposit their reserves with the central bank.
4. Custodian of the country's reserves of foreign
currencies. Central banks naturally serve as the
keeper of the country's reserve of international
currencies. The function of being custodian of
international reserves evolved from the note
issue function and that of keeping the reserves of
other banks.
In the days of metallic currency systems such as
the gold standard, the central bank kept the
metallic reserves in order to meet the possibility
of converting paper notes into metallic
equivalent on demand. And in the case of
 international trade, the metallic currency
holdings served also as a reserve. With other
banks placing their reserves in the central bank,
the centralization of the monetary reserves
followed.
In the domestic sector, a central bank may not be
hampered by lack of cash since it can always
issue new money. With respect lo international
payments, the resident of another country
require another currency acceptable to them. So,
this function of keeping foreign currencies is
significant.
In the Philippines, reserves are traditionally held
in U.S, dollars. Other currencies are the euro, the
Swiss francs and the Japanese yen while the
British pound has found its level among the
major currencies. There is also a growing use of
what are known as SDRs or special drawing
rights. Nevertheless, the world payment is still
basically the U.S. dollar and most governments
keep their reserves in this currency.
From this function of keeping the international
reserves, restrictions on foreign exchange
payments have some time been exercised by
central banks. To conserve the foreign exchange
reserves, the central bank normally keeps this
foreign exchange in other banks abroad,
normally earning interest.
5. Regulation of monetary and financial
activities. Most central banks are given the
authority to regulate the operations of all banks
and other financial institutions in the country.
This includes the supervision of banks and other
financial institutions to assure their solvency
and to protect the general public.
Among their duties related to this are the
regulation of the condition for the establishment
of new banks and the prescription of
qualifications for bank officers and directors; the
determination of the activities they can engage
in; and the conditions for deposit-taking and
loan-giving.
In general, these functions are inherent in the
role given to the central bank as the principal
institution of the monetary and financial basis of
the economy.
BANGKO SENTRAL NG PILIPINAS (BSP)
BSP is principally an institution designed to
regulate the monetary and financial systems. It normally
has a policy board which serves as the monetary
authority. The BSP provides the staff to supervise and
implement the policies enunciated by the monetary
authority. The BSP plays a vital role in the growth and
development of the country. It can achieve its objectives
and regulate monetary and credit conditions of the
country through effective use of its monetary tools.
The Bangko Sentral ng Pilipinas (BSP) was
created by R.A. 7653, otherwise known as The New
Central Bank Act, which was passed by the House of
Representatives and the Senate on June 10, 1993. It was
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signed into law on June 14, 1993 and became operational
on July 3, 1993.
Sec. 2 of said Act states that "There is hereby
established an independent central monetary authority,
which shall be known as the Bangko Sentral ng Pilipinas."
While there had been an existing Central Bank of the
Philippines which was established in 1949 by virtue of
R.A. 265, the new constitution which was ratified in 1986
had, in one of its provisions, the "creation of an
independent Central Monetary Authority which shall
provide policy directions in the areas of money, banking,
and credit and which shall have supervision over the
operations of the banks and exercise such regulatory
powers that may be provided by the law over the
operations of finance companies and other institutions
performing similar functions." The objectives of the BSP
are to maintain price stability and promote and maintain
monetary stability and convertibility of the peso.
The capital of the BSP shall be 50 billion pesos to
be fully subscribed by the government of which 10 billion
pesos was fully paid upon effectivity of R.A. 7653.
RESPONSIBILITIES AND PRIMARY OBJECTIVES
The Bangko Sentral shall provide policy
direction in the areas of money, banking and credit. It
shall have supervision over the operations of banks and
exercise such regulatory powers as provided in R.A. 7653
and other pertinent laws over operations of finance
companies and non-bank financial institutions
performing quasi-banking functions, hereafter referred
to as quasi-banks. At the helm of the Philippine Financial
System is the Bangko Sentral ng Pilipinas (BSP). It
provides policy directions in the areas of money, banking
and credit in the country. It has supervision over the
operations of banks and exercise regulatory powers over
the operations of non-bank financial institutions
performing quasi-functions.
The Objectives of the BSP under RA 7653 are:
1. To maintain price stability conducive to a
balanced and sustainable growth of the
economy.
2. To promote and maintain monetary stability and
the convertibility of peso.
BSP stands ready to support activities that serve to
strengthen the country's commercial linkages with the
world economy by:
1. Helping create a stable financial environment
2. Promoting liberal foreign exchange rules, and
3. Enhancing access to local and foreign capital to
support investment.
THE MONETARY BOARD
The powers and function of the Bangko Sentral
shall be exercised by the Monetary Board, composed of
seven members appoint. ed by the President of the
Philippines for a term of six years.
The seven members are:
a. The Governor, who shall be the Chairman of the
Monetary Board. The Governor of the Bangko
Sentral shall be subject to the confirmation by
the Commission of Appointments.
b. A member of the Cabinet to be designated by the
President of the Philippines.
 c. Five member who shall come from the private
sector, all whom shall serve full time.
Qualifications:
The members of the Monetary Board must be
natural born citizen of the Philippines, at least 35 years
of age, with the exception of the Governor who shall be at
least 40 years of age, of good moral character of
unquestionable integrity, of known recognized
competence in social and economic disciplines
Exercise of Authority
The Monetary Board shall issue rules and
regulations it considers necessary for the effective
discharge of the responsibilities and exercise of the
powers vested upon the Monetary Board and the Bangko
Sentral. The rules and regulations issued are reported to
the President and the Congress within 15 days from the
date of their issuance, direct the management operation
and administration of the Bangko Sentral, reorganize its
personnel, and issue such rules and Regulations as may
be deemed necessary or convenient for this purpose. The
legal units of the BSP, who are under the exclusive
supervision and control of the Monetary Board, shall
establish a human resource management system which
shall govern the selection, hiring appointment, transfer,
promotion, or dismissal of all personnel.
The Governor is the Chief Executive Officer of
the Bangko Sentral in all dealings with other offices,
agencies and instrumentalities of the government and all
other persons or entities, public or private, whether
domestic, foreign or international. The Governor is also
empowered to sign notes and securities issued by the
Bangko Sentral, all report balance sheets, profit and loss
statement, correspondence and other documents of the
Bangko Sentral.
GUIDING PRINCIPLES OF MONETARY
ADMINISTRATION
A. Domestic-Monetary Stabilization
The Monetary Board shall endeavor to control
any expansion or contraction in monetary aggregates
which is prejudicial to the attainment or maintenance of
price stability.
B. International Monetary Stabilization
The Bangko Sentral shall exercise its power to
preserve the international value of the peso and to
maintain its convertibility into other freely convertible
currency primarily for, although not necessarily limited
to, current payments of foreign trade and invisibles.
Actions When the International Stability of the Peso Is
Threatened
Whenever the international reserve of the BS
falls to a level the Monetary Board considers inadequate
to meet the prospective net demands on the Bangko
Sentral foreign currencies or whenever the international
reserve appears to be in imminent danger of failing to
such level or whenever the international reserve is
falling as a result of payments or remittances abroad
which in the opinion of the Monetary Board, are contrary
to the National welfare, the Monetary Board shall:
A. take such remedial measures as are appropriate
and within the powers granted to the Monetary
Board and Bangko Sentral under the provision of
this act.
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B. Submit to the President of the Philippines and to
Congress a detailed report which shall include,
as a minimum, a description and analysis of:
1. the nature and causes of existing or
imminent decline:
2. the remedial measures already taken or to
be taken by the Monetary Board:
3. the Monetary Board, fiscal or administrative
measures further proposed; and
4. the character and extent of cooperation
required from government agencies for the
successful execution of policies of the
Monetary Board.
If the resultant action fails to check the
deterioration of the reserve position of the Bangko
Sentral, or if the deterioration cannot be checked except
by the chronic restrictions on exchange and trade
transaction or by a sacrifice of the domestic growth of
the economy, Monetary Board shall propose to the
President with appropriate notice to the Congress, such
additional action as it deems necessary to restore
equilibrium in the international balance of payments of
the Philippines
MONETARY POLICY
Monetary policy refers to the manipulation of
money supply to affect the economy of a country as a
whole. It largely impacts interest rates. Increases in the
money supply lower short-term interest rates and will
encourage investments and consumption. On the long
run, however, an abundance of money supply leads to
increased prices or inflation and is undesirable. This is
where BS plays its role as the balancer. Generally
speaking, expansionary monetary policies and
contractionary monetary policies involve changing the
level of the money supply in a country. Expansionary
monetary policy is simply a policy which expands
(increases) the supply of money, whereas contractionary
monetary policy contracts (decreases) the supply of a
country's currency. Money supply is the total of currency
and coins and demand deposits in the economy.
Moffatt (2016) discussed the effects of monetary
policy in his article "What Effects Does Monetary Policy
Have?" Expansionary monetary policy that increases the
money supply causes an increase in bond prices and a
reduction in interest rates. Lower interest rates lead to
higher levels of capital investment. They make domestic
bonds less attractive, so the demand for domestic bonds
falls and the demand for foreign bonds rises. All else
being equal, a larger money supply lowers market
interest rates. Conversely, smaller money supplies tend
to raise market interest rates.
When central bank wishes to increase money supply, it
can do a combination of three things:
1. Purchase securities in the open market, known
as open market operations.
2. Lower the government discount rate.
3. Lower reserve requirement on banks.
These directly impact the interest rate. When the
national treasury buys securities in the open market, the
price of those securities rises. Bond prices and interest
rates are inversely related. Government discount rate is
an interest rate, so lowering it is essentially lowering
interest rates. If the national treasury decides instead to
lower reserve requirements, this will cause banks to
have an increase in the amount of money they can invest
or lend. This causes the price of investments such as
bonds to rise, so interest rates must fall. No matter what
tool the central bank uses to expand the money supply,
interest rates will decline and bond prices will rise.
Increases in bond prices will affect the exchange market.
Assuming an increase in Philippine bond prices,
investors would want sell those bonds in exchange for
other lower-priced bonds. Investors will sell the
Philippine bonds because they will receive higher
proceeds. So an investor will sell his Philippine bond,
exchange his peso for dollar, and buy a US bond. This
causes the supply of peso in foreign exchange markets to
increase and the supply of dollar in the foreign exchange
markets to decrease. This will cause peso to become less
valuable relative to the dollar, The lower exchange rate
makes Philippine-produced goods cheaper in the US and
US-produced goods more expensive in the Philippines.
Therefore, exports will increase and imports will
decrease causing the balance of trade to increase. When
interest rates are lower, the cost of financing capital
projects is less. So all else being equal, lower interest
rates lead to higher rates of capital investment.
We can observe the following relative to
contractionary monetary policy:
1. Contractionary monetary policy causes an
increase in bond prices and a reduction in
interest rates.
2. Lower interest rates lead to higher levels of
capital investment
3. The lower interest rates make domestic bonds
less attractive, so the demand domestic bonds
falls and the demand for foreign bonds rises.
4. The demand for domestic currency falls and the
demand for foreign currency ri causing a
decrease in the exchange rate. The value of the
domestic currency is r lower relative to foreign
currencies.
5. Lower exchange rate causes exports to increase,
imports to decrease, and bala of trade to
increase.
The effects of a contractionary monetary policy
are precisely the opposite of an expansionary monetary
policy. When the central bank wishes to decrease money
supply, it can do a combination of three things:
1. Sell securities in the open market, known as
open market operations.
2. Raise the discount rate.
3. Raise the reserve requirements.
These cause interest rates to rise, either directly
or through the increase in the supply of bonds in the
open market through sales by the national treasury or by
banks. This increase in supply of bonds reduces the price
for bonds. These bonds will be bought by foreign
investors, so the demand for domestic currency will rise
and the demand for foreign currency will fall.
Thus, the domestic currency will appreciate in
value relative to the foreign currency. The higher
exchange rate makes domestically produced goods more
expensive in foreign markets and foreign goods cheaper
in the domestic market. Since this causes more foreign
goods to be sold domestically and less domestic goods
sold abroad, the balance of trade decreases. The interest
rates cause the cost of financing capital projects to go
higher, so capital investment will be reduced.
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We can observe the following relative to
contractionary monetary policy:
1. Contractionary monetary policy causes a
decrease in bond prices and an increase in
interest rates.
2. Higher interest rates lead to lower levels of
capital investment.
3. Higher interest rates make domestic bonds more
attractive, so the demand for domestic bonds
rises and the demand for foreign bonds falls.
4. The demand for domestic currency rises and the
demand for foreign currency falls, causing an
increase in the exchange rate. The value of the
domestic currency is higher relative to foreign
currencies.
5. Higher exchange rate causes exports to decrease,
imports to increase, and balance of trade to
decrease
The highlights of the meeting of the Monetary Board
on monetary policy stance held on 15 December 2022
include the following (source: BSP.gov.ph):
I. Monetary Policy Decision
The Monetary Board decided to:
a. Raise the BSP’s current policy interest rate by 50
basis points to 5.50 percent for the overnight RRP
rate; and
b. Increase the current interest rates on the overnight
deposit facility (ODF) to 5.0 percent and overnight
lending facility (OLF) to 6.0 percent.
II. Key Considerations in the Formulation of the
Monetary Policy Stance
• The latest baseline inflation forecasts continue
to show an above-target inflation path over the
policy horizon. The updated forecast path
shows inflation peaking in December 2022.
From there, inflation is seen to decelerate but
remain elevated well into the first half of 2023.
By Q3 2023, inflation will likely revert to within
the 2-4 percent target band before settling
close to the lower end of the target range in Q4
2023 and Q1 2024, largely due to base effects.
Thereafter, inflation will stabilize and return to
the midpoint of the target by Q2 2024.
• The Monetary Board noted that, at present,
inflation remains high and broad-based, as seen
in the sharp increase in core inflation and the
further rise in inflation expectations.
• Meanwhile, the risks to the inflation outlook are
strongly tilted to the upside in 2023 but remain
broadly balanced for 2024.
• Amid broad-based inflation pressures, persistent
upside risks to inflation, and elevated inflation
expectations, the Monetary Board deemed it
necessary to take aggressive monetary action
to bring headline inflation back to within target
as soon as possible. Continued monetary
tightening will also provide a cushion against
external spillovers even as major central banks
have signaled a possible slowing down of
monetary policy tightening.
 • To mitigate the effects of persistent supply-side
pressures on commodity prices, the Monetary
Board also noted the continuing need for timely
nonmonetary interventions by the National
Government in alleviating supplyside shortages
and strengthening farm productivity.
III. Recent Developments and Inflation Outlook
The Monetary Board considered the recent
macroeconomic and financial developments discussed
below in assessing the monetary policy stance:
A. Domestic price conditions
• Headline inflation increased further to 8.0
percent year-on-year (y-o-y) in November
2022 from 7.7 percent in October 2022, the
highest recorded rate since November 2008.
The rise in inflation in November 2022 was due
primarily to higher inflation for food and non-
alcoholic beverages. Inflation for rice, fruits,
sugar, and vegetables also registered larger
increases. Under non-food items, restaurants
and accommodation services also contributed
to the further uptick in inflation. The resulting
year-to-date average inflation of 5.6 percent
was above the NG’s average inflation target
range of 2-4 percent for the year.
• Likewise, core inflation, which depicts
underlying demand-side pressures, rose to 6.5
percent in November 2022 from 5.9 percent in
October 2022. The higher official core inflation
reflected rising food costs, which have driven
inflation for other large-weighted CPI items
such as other food and non-alcoholic beverages
as well as restaurants and accommodation
services.
B. Inflation expectations
• Inflation expectations also rose further. The
BSP’s survey of private sector economists for
December 2022 showed higher mean inflation
forecasts for 2022 at 5.9 percent (from 5.7
percent based on the November 2022 survey)
and for 2023 at 5.1 percent (from 4.9 percent).
• Similarly, the results of the BSP’s Q4 2022
expectations survey on businesses and
households indicate that both sectors
anticipate inflation to breach the upper end of
the government’s 2-4 percent target range for
2022 and 2023.
C. Inflation outlook
• The latest baseline forecasts continue to
show an above-target inflation path, with
average headline inflation seen at 5.8 percent
for 2022 and at 4.5 percent for 2023 before
decelerating towards the midpoint of the
target range at 2.8 percent for 2024. The
forecast for 2022 is unchanged, while that for
2023 has been raised due to the higher-than
expected inflation outturn in November, the
higher inflation nowcast for December, and
the approved water rate increases starting
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2023. The impact of these factors was partly
offset by the lower crude oil price assumption
and the peso appreciation. Meanwhile, the
lower forecast for 2024 could be attributed to
the further easing in oil prices, the peso
appreciation, and lower domestic growth
outlook following the cumulative policy rate
adjustments of the BSP.
• The risks to the inflation outlook remain
strongly tilted to the upside in 2023 but
broadly balanced for 2024. The expected
upside risks to inflation over the policy
horizon stem mainly from elevated
international food prices due to high fertilizer
prices and supply chain constraints. On the
domestic front, trade restrictions, increased
prices of fruits and vegetables due to weather
disturbances, higher sugar prices, pending
petitions for transport fare increases, as well
as potential wage adjustments in 2023 could
push inflation upwards. Meanwhile, the
impact of a weaker-than-expected global
recovery continues to be the primary
downside risk to the outlook.
D. Demand conditions
• The Philippine economy is expected to remain
on a recovery path over the near term. GDP
growth is projected to settle within the DBCC’s
targets for 2022 and 2023, but slightly below
the 6.5-8.0 percent target for 2024. The slower
growth is mainly due to the lower global GDP
growth assumption for 2023 and the impact of
the policy rate adjustments of the BSP.
• Domestic labor market conditions continued to
show overall improvement, with the
unemployment rate declining to 4.5 percent in
October 2022 from 5.0 percent and 7.4 percent
a month ago and a year ago, respectively.
E. Supply-side indicators
Developments in Agriculture
• Nationwide average retail rice prices increased
in November 2022 based on the results of the
2018-based PSA Retail Price Survey (RPS)
covering all provinces and key cities in the
country. The uptick in average rice prices in
November 2022 was attributed to the lingering
impact of agricultural damages and losses left
by strong typhoons that hit the country during
the main harvest season.
• Prices of key food items have risen as
lingering supply-side issues and spillover
effects of the Russia-Ukraine conflict have led
to persistent global supply chain bottlenecks
and soaring prices of fuel, feeds, and fertilizers.
Likewise, the country’s vulnerability to natural
calamities and animal diseases continue to
weigh on agricultural production. To cushion
the impact of these challenges on the country’s
food security, the National Government has
implemented crucial non-monetary measures
 to fill short-term supply gaps (e.g., temporary
reduction of tariff rates and timebound
increase in import volumes and expansion of
import sources) and boost local production
(e.g., longer-term productivity-enhancing
programs).
• Based on the latest assessment as of 10
November 2022, prevailing La Niñ a conditions
will likely persist through February 2023 and
then transition to ENSO-neutral conditions by
February-March-April 2023 season.
Nonetheless, continuing La Niñ a conditions
may pose the risk of more frequent tropical
cyclones and sustained flooding, which could
adversely affect the agriculture sector, as well
as present upside pressures on inflation. On the
other hand, above-normal rainfall conditions
associated with La Niñ a may also boost water
supply in harvest areas and thus potentially
enhance agricultural production.
Oil Price Developments
• Global crude oil prices declined amid worries
over weakening demand due to restrictive
financial conditions, slowing global growth, and
reduced demand from China. As such, futures
prices of Brent crude oil remained in
backwardation. Meanwhile, as of November
2022, the US Energy Information
Administration (EIA) expects global supply and
demand in oil markets to be generally balanced
in 2023, although possible additional
production cuts from OPEC+ and increased
global economic uncertainty pose significant
risks to the EIA’s outlook.
• Domestic pump prices for gasoline, kerosene,
and diesel have declined in recent weeks.
However, on a year-to-date basis, prices of
gasoline, kerosene, and diesel remained
significantly higher compared to end-2021
levels.
Developments in the Utilities Sector
• The overall electricity rate increased in
December 2022 due to the completion of
distribution-related refunds for residential
customers. Three (3) such refunds are still
ongoing, which are expected to be completed
by December 2022, January 2023, and May
2023.
• Meanwhile, the increase in electricity rates was
tempered by the decline in generation charges.
Charges from Power Supply Agreements (PSAs)
fell as the First Natgas-San Gabriel plant went
back online after its scheduled maintenance
outage in October. The recent appreciation of
the peso against the US dollar also contributed
to the reduction in cost. Similarly, cost of
electricity from the Wholesale Electricity Spot
Market (WESM) decreased on improved supply
conditions in the Luzon grid.
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F. Financial market developments
• The peso depreciation against the US dollar
slowed down to 9.8 percent year-to-date as of
29 November 2022, from 12.0 percent in
October. The peso appreciated on positive
market sentiment in November amid
lowerthan-expected US inflation in October,
which fueled optimism that the US Federal
Reserve could slow its pace of rate increases,
and the decline in global oil prices. On the
domestic front, optimism over releases of
positive news, specifically, higher gross
international reserves (GIR) for October; the
lower unemployment rate for September;
higher-than-expected GDP growth in Q3 2022;
the rise in overseas Filipino (OF) remittances in
September; improvement in balance of
payments (BOP) data in October; and the
reinstatement of investment grade rating for
the Philippines by S&P likewise contributed to
the appreciation of the peso.
• The Philippine Stock Exchange Index (PSEi)
averaged 6,388.9 index points in November,
higher by 6.6 percent than its October average.
The recovery in the benchmark index could be
attributed to improved market sentiment
following positive developments in the
domestic economy, including: faster-than-
expected Q3 2022 GDP growth of 7.6 percent;
positive third-quarter corporate earnings
reports; and S&P Global Ratings’ affirmation of
the Philippines’ investment-grade credit rating
of BBB+ with a stable outlook. Against this
backdrop, there was market optimism on the
economy’s ability to absorb the 75-bp rate
increase by the BSP at its November policy
meeting. Market expectations of a slower pace
of monetary policy tightening by the US Federal
Reserve also contributed to renewed investor
confidence.
G. Domestic liquidity and credit conditions
• Domestic liquidity and credit conditions
continued to support bank lending and broad-
based economic recovery. Preliminary data
show that domestic liquidity (M3) grew by 5.4
percent year-on-year to about ₱15.4 trillion in
October from 5.2 percent in September.
Meanwhile, outstanding loans of universal and
commercial banks for both production and
consumption activities increased by 12.5
percent in October (from 12.3 percent in
September) and 22.6 percent (from 20.6
percent), respectively.
• Secondary market government security yields,
especially in the middle of the yield curve,
declined on 5 December 2022. Yields fell as
banks serviced their client requirements and
reinvested their excess funds. The decline in
yields at the belly of the curve was also
supported by market expectations that the BSP
could also move to a slower pace of policy rate
increases amid signals from the US Federal
 Reserve that it could slow the pace of its
upcoming rate increases.
H. Fiscal developments
• Fiscal consolidation continued as the National
Government (NG) recorded a deficit of
P1,1111.8 billion for January - October 2022,
7.6 percent lower than recorded in the same
period in 2021. Netting out the interest
payments, the primary deficit amounted to
P678.7 billion, 18.5 percent lower than the
amount recorded in 2021.
I. External developments
• Global economic activity contracted faster in
November due to further declines in
manufacturing output and service sector
revenues amid a broad slump in business
activity in major economies such as the United
States, the Euro Area, United Kingdom, Japan,
China, and Brazil.
• Global economic output contracts for the fourth
consecutive month amid a broad slowdown in
business activity. The JP Morgan All-Industry
Output Index fell further to 48.0 in November
from 49.0 in October, reflecting the
contractions in output, new business, new
export business, and outstanding business.
Although price pressures have eased amid the
decline in input costs and selling charges,
businesses recorded lower revenues as rising
interest rates, prolonged geopolitical risks,
elevated inflation, and heightened market
volatility weighed on private demand.
Nonetheless, the global economy's rate of
contraction was partially offset by the faster
expansion in India.
• Amid major central banks’ aggressive monetary
policy tightening, global financial conditions
have also continued to tighten. Several central
banks have raised their respective key policy
rates in November to address persistent and
broadening price pressures as well as to anchor
inflation expectations.
BSP uses several tools to implement its
monetary policies other than controlling interest rates.
Among these tools are its open market operations
(buying and selling government securities), reserve
requirements on banks, discount rate, credit control,
money supply, etc. Monetary policy seeks to influence
either the demand for or supply of excess reserves
resulting from the implementation of monetary policy
triggering a sequence of events that affect such economic
factors as short-term interest rates, long-term interest
rates, foreign exchange rates, the amount of money and
credit in the economy, and the levels of employment,
output, and prices.
GEN-FM-019 Rev 1 Effective 30 Sept 2022
Depository institutions trade excess reserves
held at the central bank among themselves. Those with
excess reserves earn by lending them to banks with
deficit as explained under interbank call loan. The rate of
interest on these interbank transactions becomes a
benchmark interest rate to guide monetary policy. This
rate is a function of the supply and demand for central
bank funds among banks and the effects of the central
bank trading in its open market operations.
The open market operations of BS influence
money supply because when it sells securities, it siphons
off the funds or money supply in the economy, thereby
decreasing money supply. When it buys back securities,
it gives back to the economy the money supply.
When BSP increases the reserve requirement on
banks, it reduces the amount available to banks for
lending to borrowers, thus limiting the credit and
ultimately the money supply. When this reserve
requirement is lowered, loans that banks can grant are
increased ultimately increasing the money supply.
Monetary policy works largely through its
impact on interest rates. Increases in money supply
lower interest rates, which stimulate demand. As money
supply increases, investors will be encouraged to buy
more securities (stocks or bonds) forcing securities
prices up and interest rates down. In the long run,
investors may increase their holdings of securities and
ultimately buy tangible assets, which stimulate
consumption demand directly.
In implementing monetary policy, BSP can take one of
two basic approaches to affect the market for bank
excess reserves:
1. Target the quantity of reserves in the market
based on BS's open market operations'
objectives for growth in the monetary base (the
sum of money in circulation and reserves) and in
turn, the money supply; or
2. Target the interest rate on those reserves that
BSP is granting.
The approach taken varies according to the need to
combat inflation and the desire to encourage sustainable
economic growth.
REFERENCES:
Mariano, N.L. (2014).Elements of Finance. Rex bookstore
Inc.
Mariano, N.L. (2017). Capital Markets. Rex bookstore, Inc.
Bsp.gov.ph
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