MONETARY POLICY

Definitions, Tools, Types, & Effects to the financial markets

WHAT IS MONETARY POLICY?
This refers to actions performed by a
central bank to regulate the supply of
money to attain stable prices and
ultimately, promote economic growth.
 HOW IMPORTANT IS BSP IN MONETARY POLICY IN OUR COUNTRY?

BSP main responsibility is to formulate and implement policy in

the areas of money, banking and credit with the primary objective
of preserving price stability.
MONETARY POLICY TOOLS

1. POLICY INTEREST RATE

It is an interest rate that the monetary

authority sets in order to influence the
evolution of the main monetary
variables in the economy.
MONETARY POLICY TOOLS

2. RESERVE REQUIREMENTS

refer to 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.
MONETARY POLICY TOOLS

3. REDISCOUNTING WINDOW

The rediscounting window is a standing

credit facility provided by the BSP to help
banks meet temporary liquidity needs by
refinancing the loans they extend to their
clients.
 4. OPEN MARKET OPERATIONS

refer to the buying/selling of government securities, lending/borrowing

against underlying assets as collateral, foreign exchange swaps, and the
use of other monetary instruments of the Bangko Sentral aimed at
influencing the underlying demand and supply conditions in the
financial system.
 HOW DO MONETARY POLICY TOOLS WORKS?
 Increasing the policy interest rate would have the effect of
restricting the money supply and vice versa.

 Increasing the reserve requirements would decrease the

money supply and vice versa.

 Selling government securities would decrease the money

supply and vice versa.

 Reducing the rediscounting window would limit the money

supply and vice versa.
TYPES OF MONETARY POLICY
 Contractionary
 Expansionary
HOW DO MONETARY POLICY WORK?

Monetary policy as the faucet

BSP as the person who controls

the faucet

Water as the supply of money in

the economy
1. CONTRACTIONARY
When there is “too much money” in the
economy supporting overall demand for
goods and services which increases
inflationary pressures. The BSP “tightens”
the faucet to reduce the money supply.
This action dampens which could lead to
lower inflation.

 Higher interest rate

 Less lending/borrowing
 More savings
 Less spending
2. EXPANSIONARY
When there is “too little money” in the
economy which dampens overall demand
for goods and services, the BSP “loosens”
the faucet to expand money supply.

 Lower interest rates

 More lending/borrowing
 Less savings
 More spending
MONETARY POLICY EFFECTS IN THE FINANCIAL MARKETS

Monetary policy is enacted by a central bank to

 sustain a level economy

 keep unemployment low
 protect the value of the currency
 and maintain economic growth
 Thank you for listening!

GROUP 1