What is monetary policy?

… refers to the measures or actions

taken
by the central bank to influence the
general price level and the level of
liquidity in the economy.

Source: www.bsp.gov.ph
 Objective of the Monetary
Policy

To promote a low and stable

inflation conducive to a balanced
and sustainable economic
growth.

Source: www.bsp.gov.ph
 Settings of Monetary Policy
Expansionary Contractionary

Intends to increase the level of Intends to decrease the level of

liquidity/money supply in the economy liquidity/money supply in the economy
and which could result in a relatively and which could also result in a
higher inflation path for the economy. relatively lower inflation path for the
economy.

Source: www.bsp.gov.ph
In cases of unemployment, recession, and
deflation -
Remedy is to increase money in circulation and inducing
spending.

Government actions:

buying bonds in the open

market and reducing interest
rates.
In times of inflation -

Remedy is to reduce money

in circulation.

Government actions: selling

bonds in the open market
and increasing interest rates.
 Open Market Operations
- the sale or purchase of government securities by the BSP
to withdraw liquidity or inject liquidity into the system.
 • Primary: overnight reverse
Monetary repurchase (borrowing rate) and
Policy overnight repurchase * (lending) rate;
• Raisings policy/reducing the BSP’s
Instruments policy interest rates;
• Increasing/decreasing the reserve
requirement;
• Encouraging/discouraging deposit in
the special deposit account (SDA)*
facility by banks and trust entities of
BSP-supervised financial institutions;
• Increasing/decreasing rediscount
rates
• Outright sales/purchases of the BSP’s
holdings of government securities.
* As of 3June 2016, replaced with overnight lending facility
(OLF) and overnight deposit facility (ODF), respectively.
Source: www.bsp.gov.ph
BSP Terms:

• Reverse Repurchase Rate (RRR) - the policy rate at which the BSP
borrows from banks with government securities as collateral.
• Reserve Requirement – the proportion of banks’ deposits and deposit
substitute liabilities that banks are required to hold as reserves.
• Special Deposit Accounts (SDA) – fixed term deposits with the BSP by
banks and trust entities of BSP-supervised financial institutions .
• Rediscounting – a special refinancing facility of central banks wherein
a financial institution borrows money from the BSP using promissory
notes and other loan papers of its borrowers as collateral.

Source: www.bsp.gov.ph
Instruments under the IRC System
-
1. Open Market Operations (OMO)
• Reverse Repurchase/Repurchase transactions
• Outright purchases and sales of securities
• Foreign exchange swaps

2. Acceptance of term deposits

• Term Deposit Facility (TDF)

3. Standing Liquidity Facilities

• Overnight Deposit Facility
• Overnight Lending Facility
Source: www.bsp.gov.ph