Chapter 2: Philippine Monetary Policy PDF

FM103 - Monetary Policy and CHAPTER 2 Central Banking Chapter 2 Philippine Monetary Policy Instr. Cyril Mae De Leon, MBA  FM103 - Monetary Policy and Chapter 2 Central Banking...

FM103 - Monetary Policy and CHAPTER 2 Central Banking Chapter 2 Philippine Monetary Policy Instr. Cyril Mae De Leon, MBA  FM103 - Monetary Policy and Chapter 2 Central Banking Monetary policy is a set of tools used by a nation's WHAT IS MONETARY central bank to control the overall money supply POLICY? and promote economic growth and employ strategies such as revising interest rates and changing bank reserve requirements. ACTIONS OF THE BSP To manage the supply and cost of money and credit To influence overall demand for goods and services To attain price stability  FM103 - Monetary Policy and Chapter 2 Central Banking We can think of the monetary policy as the faucet. BSP as the person who controls the faucet and water as the supply of money in the economy 2 Types of Monetary Policy Contractionary - When there is “too much money” in the economy supporting overall demands for goods and services which in turn increases inflationary pressures, the BSP “tightens” the faucet to reduce the money supply. This action dampens demand which could lead to lower inflation. What can happen? Higher Interest rates, Less lending/borrowing, More savings, Less spending 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. What can happen? Lowe Interest rates, More lending/borrowing, Less savings, More spending FM103 - Monetary Policy and Chapter 2 Central Banking The Philippine economic and financial landscape has greatly shaped the evolution of the country’s central banking in the last 70 years. To better respond to these challenges, the conduct of central banking had also evolved through the adoption of different monetary frameworks.  FM103 - Monetary Policy and Chapter 2 Central Banking BSP’s Monetary Policy Over the Years  FM103 - Monetary Policy and Chapter 2 Central Banking Policies Implemented The Central Bank Act (June 15, 1948) Central Bank of the Philippines was given developmental role to support recovery efforts of the country. Amending Republic Act No. 265 The Central Bank Act (November 29, 1972) Central Bank charter shifted from development-oriented to one focused on maintaining internal and external monetary stability in the Philippines New Central Bank Act (June 14, 1993) The New Central Bank Act passed into law reconstructed and recapitalized central bank. Price Stability as overriding objective. RA 11211 - Amending Republic Act No. 7653 The New Central Bank Act (February 14, 2019 Resolution of CB’s authority to issue debt papers as part of its regular operation gives the BSP greater flexibility in determining the timing and size of its monetary operations. The reinstatement of the CB’s authority to require information from the non-bank private sector expands and upgrades the quantity and quality of the information set used by the BSP in policy formulation. FM103 - Monetary Policy and Chapter 2 Central Banking Monetary Policy Framework (1985 - Q2 1995) - Monetary Aggregate Targeting 1. Central Bank announces an annual growth target of monetary aggregates 2. Central Bank determines the level of money supply needed to achieve a desired level of inflation Domestic liquidity serves as money supply Base money as the operating target 3. Assumptions There is a stable and predictable relationship between money, output, and inflation Change in money supply triggers change in price or inflation Stable velocity of money (rate at which money circulates or changes hands over a given period of time Central Bank controls domestic liquidity FM103 - Monetary Policy and Chapter 2 Central Banking Monetary Policy Framework (Q3 1995 - 2001) - Modified Monetary Targeting 1. Greater emphasis on price stability instead of strictly attaining set targets for monetary aggregates 2. Enhance effectiveness of monetary policy by complementing monetary aggregate targeting with some form of inflation targeting 3. Monetary targets could be exceeded as long as inflation targets are met 4. Monitors larger set of economic variables in making decisions regarding appropriate stance of monetary policy FM103 - Monetary Policy and Chapter 2 Central Banking Monetary Policy Framework (2022 - Present) - Inflation Targeting 1. Government sets inflation target (in consultation with BSP); BSP announces inflation target 2. BSP assesses monetary conditions and forecasts inflation 3. Is the inflation forecast in line with target? If YES, no change in policy settings If NO, BSP adjusts policy settings 4. BSP communicates through press statements, highlights of Monetary Board meetings, inflation reports, and open letter to the President FM103 - Monetary Policy and Chapter 2 Central Banking Thank you The End Instr. Cyril Mae De Leon, MBA