Central Bank of the Philippines Monetary Policy

Questions and Answers

What is the effect of the BSP selling government securities in the open market?

It raises the reserve requirement for banks.

It increases the liquidity in the banking system.

It signals a reduction in interest rates.

It decreases the overall money supply. (correct)

How does an increase in the reserve requirement impact bank lending?

It encourages banks to lend more money.

It has no effect on lending activity.

It reduces the amount of money banks can lend. (correct)

It increases public deposits in banks.

What is the role of policy interest rates set by the BSP?

To regulate open market operations.

To indicate the overall liquidity in the financial market.

To signal the monetary policy stance and influence borrowing. (correct)

To determine the reserve requirements of banks.

What is the purpose of the Term Deposit Facility (TDF) used by the BSP?

To manage the liquidity of banks by allowing them to deposit excess funds. Signup and view all the answers

What happens to the economy when the BSP lowers the policy interest rates?

It encourages increased borrowing and spending. Signup and view all the answers

If the BSP wishes to decrease the money supply, which of the following actions would it take?

Raise the reserve requirement ratio. Signup and view all the answers

What impact does an expansionary monetary policy typically have on the economy?

It increases the demand for loans and stimulates economic activity. Signup and view all the answers

What is indicated by a contractionary monetary policy?

Decreased spending and higher interest rates. Signup and view all the answers

What is the primary purpose of the Term Deposit Facility (TDF) offered by the BSP?

To absorb excess liquidity and manage short-term interest rates. Signup and view all the answers

Which of the following best describes the Special Deposit Account (SDA)?

A facility for banks to place excess reserves and manage liquidity. Signup and view all the answers

How does the Rediscounting Facility assist banks in managing their liquidity?

By offering loans based on eligible loan papers as collateral. Signup and view all the answers

What is the BSP's aim when it intervenes in the foreign exchange market?

To stabilize the peso's exchange rate. Signup and view all the answers

Which of the following statements about moral suasion is true?

It leverages influence to encourage desired banking behaviors without formal regulations. Signup and view all the answers

What effect does the BSP's purchase of foreign exchange have on the Philippine economy?

It increases the amount of pesos circulating in the economy. Signup and view all the answers

What is the significance of having multiple tenors available in the TDF auction?

It enhances the BSP's ability to absorb liquidity in various durations. Signup and view all the answers

Which of the following best encapsulates the concept of inclusive growth as outlined by the BSP?

Growth that creates employment opportunities and reduces poverty while ensuring access to essential services. Signup and view all the answers

Study Notes

Central Bank of the Philippines (BSP)

BSP aims for price stability and financial stability through various monetary policy tools.

Tools of Monetary Policy

Open Market Operations

Involves buying or selling government securities to adjust liquidity in the banking system.
Selling securities absorbs liquidity (contractionary policy); buying injects liquidity (expansionary policy).

Reserve Requirement

The reserve requirement ratio dictates the percentage of deposits that banks must retain in reserves.
Increasing the reserve requirement restricts money supply (contractionary); decreasing it boosts money supply (expansionary).
Effective June 30, 2023, reserve requirements were set at:
- Universal Banks/Commercial Banks: 9.5% for demand deposits, NOW accounts, savings deposits.
- Digital Banks: 6% for the same categories.

Policy Interest Rates

BSP uses overnight reverse repurchase (RRP) rates to guide monetary policy stance.
Lowering interest rates supports borrowing and spending (expansionary); raising rates helps control inflation (contractionary).

Term Deposit Facility (TDF)

Used to manage excess liquidity in the financial system, allowing banks to deposit surplus funds for a fixed term.
TDF offers auctions for deposits with tenors of 7, 14, and 28 days, attracting funds and managing short-term interest rates.

Special Deposit Account (SDA)

Allows banks to place excess reserves at the BSP to manage liquidity and influence money market rates.
Functions as a settlement account for special funds, facilitating deposits and withdrawals as per regulation.

Rediscounting Facility

Enables banks to borrow from the BSP using eligible loans as collateral, offering liquidity for temporary needs.
Supports banks in refinancing loans extended to clients, enhancing overall money supply.

Foreign Exchange Operations

BSP intervenes in the foreign exchange market to stabilize the peso's value via buying and selling currencies.
Purchases of foreign exchange paid in pesos increase peso circulation, which can influence inflation and economic stability.

Moral Suasion

Utilizes influence rather than regulation to guide banks toward certain practices, encouraging adherence to BSP policy directions.

Inclusive Growth

BSP's monetary policies target sustainable economic growth that creates jobs, reduces poverty, and improves access to essential services in health and education.
Focuses on providing equal opportunities and empowering individuals through education and skill development.

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Description

Explore the various tools employed by the Central Bank of the Philippines (BSP) to achieve price and financial stability. This quiz covers open market operations, reserve requirements, and policy interest rates, including recent changes effective June 30, 2023. Test your understanding of how these monetary policy tools impact the economy.