FMKT-213

Financial Markets
Chapter 1 Module 2:
Monetary Policy
(Operating Targets, Intermediate Targets, Ultimate Targets)
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 Last Lesson We Discussed:

 Chapter 1: Role of Financial Markets and Institutions

 Why Study Financial Markets and Institutions?
 Functions of the Financial Market
 Structure of the Financial Market
 Types of Financial Markets
 Securities Traded in Financial Markets
 Global Financial Markets
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 This Lesson We Will Discuss:

 Monetary Policy
 The Banko Sentral ng Pilipinas
 Operating Targets
 Intermediate Targets
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 Monetary Policy:

 Refers to the actions taken by a nation’s central bank

to control money supply and achieve the nation’s
macroeconomic goals that promote sustainable
economic growth.
(https://www.investopedia.com/terms/m/monetarypolicy.asp)

 The central bank of the Philippines is called the

Banko Sentral ng Pilipinas
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 Monetary Policy:

 Monetary policy is the process of drafting,

announcing, and implementing the plan of actions
taken by the central bank 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.
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 Monetary Policy:

 Monetary policy consists of the management

of money supply and interest rates, aimed at meeting
macroeconomic objectives such as
controlling inflation, consumption, growth, and
liquidity.
 This is achieved by modifying the interest rate, buying
or selling government bonds, regulating foreign
exchange (forex) rates, and changing the amount of
money that banks are required to maintain as cash
reserves.
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 Monetary Policy:

 Monetary policy is formulated based on inputs

gathered from a variety of sources such as:
 Gross domestic product (GDP)
 Inflation
 Industry/sector-specific growth rates and associated
figures
 Geopolitical developments in international markets—
including oil embargos or trade tariffs.
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 Monetary Policy:

 Basically, monetary policy is used to balance

economic growth with inflation.

 Additional reading: You can read the full article here

https://www.investopedia.com/terms/m/monetarypolic
y.asp
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 Bangko Sentral ng Pilipinas:

 BSP, the central bank of the Philippines.

 Established July 3, 1993 

1993 pursuant to the provision of
Republic Act 7653 or the New Central Bank Act of
1993 as amended by Republic Act 11211 or the New
Central Act of 2019
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 Bangko Sentral ng Pilipinas:

 Roles and responsibilities:

 Liquidity management, by formulating and implementing

monetary policy aimed at influencing money supply,
consistent with its primary objective to maintain price
stability,
 Currency issue. The BSP has the exclusive power to issue
the national currency. All notes and coins issued by the BSP
are fully guaranteed by the Government and are
considered legal tender for all private and public debts,
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 Bangko Sentral ng Pilipinas:

 Roles and responsibilities:

 Lender of last resort, by extending discounts, loans and

advances to banking institutions for liquidity purposes,
 Financial supervision, by supervising banks and exercising
regulatory powers over non-bank institutions performing
quasi-banking functions,
 Management of foreign currency reserves, by maintaining
sufficient international reserves to meet any foreseeable net
demands for foreign currencies in order to preserve the
international stability and convertibility of the Philippine peso,
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 Bangko Sentral ng Pilipinas:

 Roles and responsibilities:

 Determination of exchange rate policy, by determining the

exchange rate policy of the Philippines. Currently, the BSP
adheres to a market-oriented foreign exchange rate policy,
and
 Being the banker, financial advisor and official depository of
the Government, its political subdivisions and
instrumentalities and GOCCs.
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 Bangko Sentral ng Pilipinas:

 Additional readings on central banks and the BSP

 http://www.bsp.gov.ph/

 Or use the references at

https://en.wikipedia.org/wiki/Central_bank
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 The Operating Target:

 Signals the central bank’s monetary policy stance

 Can be specified through:
 Interest rate
 Exchange rate
 Growth rate of reserve money
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 The Operating Target:

 Generally assigned specified as:

 Explicitly, based on an announced target for a market rate, or
 Implicitly, based on the rate attached to a central bank
instrument
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 The Operating Target:

 Operating targets are short-term rates, seven days or

less. Reasons:
 First, central banks have more control over short-term rates,
given their monopoly over bank reserves.
 Second, longer rates require central banks to carry more
duration or credit risk.
 Third, targeting longer rates may induce more short-term rate
volatility due to shocks to term premiums.
 Fourth, holding longer-term rates fixed in between policy
meetings could complicate communications and be financially
costly when policy rate changes are needed and widely
expected.
That’s all folks!