Monetary Policy Tools of BSP

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Questions and Answers

What is the primary objective of the Bangko Sentral ng Pilipinas (BSP) when utilizing monetary policy tools?

Foreign investment attraction

Economic growth acceleration

Increased bank profitability

Price and financial stability (correct)

What happens when the BSP sells government securities in the open market?

It increases banks' reserve requirements

It decreases the interest rates

It injects liquidity into the banking system

It absorbs liquidity from the banking system (correct)

How does an increase in the reserve requirement affect banks' lending activities?

It has no impact on lending

It reduces banks' lending activity (correct)

It allows banks to lend at lower interest rates

It encourages banks to lend more

What effect does lowering the overnight reverse repurchase (RRP) rate have on the economy?

It encourages borrowing and spending Signup and view all the answers

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

To manage liquidity in the financial system Signup and view all the answers

What occurs when the BSP lowers the reserve requirement ratio?

The money supply increases Signup and view all the answers

Which tool does the BSP NOT use to influence money supply in the economy?

Direct taxation policies Signup and view all the answers

What is the impact of raising the policy interest rates by the BSP?

It cools down economic activity Signup and view all the answers

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

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

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

A tool for managing liquidity and influencing money market rates Signup and view all the answers

How does the BSP primarily use the Rediscounting Facility?

To allow banks to borrow against eligible loan papers as collateral Signup and view all the answers

What is the main goal of the BSP's foreign exchange operations?

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

What does moral suasion refer to in the context of the BSP?

Influencing financial institutions to follow guidelines without formal regulation Signup and view all the answers

What is one of the key features of the Special Deposit Account?

It is used to receive and pay special funds Signup and view all the answers

What impact does the BSP's purchase of foreign currency have on the economy?

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

Which of the following describes the main goal of inclusive growth as per BSP's perspective?

Ensuring economic growth leads to poverty reduction and equal opportunities 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

This quiz examines the various tools of monetary policy utilized by the Central Bank of the Philippines (BSP) including open market operations, reserve requirements, and policy interest rates. Learn how these tools are used to achieve price and financial stability in the economy.