Monetary Policy & Central Banking: Supply of Money PDF

Monetary Policy & Central Banking: Supply of Money Presenter: Efren James S. Aquino, MBA OBJECTIVES Key Roles of the BSP in Monetary Policy Monetary Policy Framework in the Philippines Monetary Policy Challenges in the Philippines Recent Monetary Policy Actions in the Philippines M...

Monetary Policy & Central Banking: Supply of Money Presenter: Efren James S. Aquino, MBA OBJECTIVES Key Roles of the BSP in Monetary Policy Monetary Policy Framework in the Philippines Monetary Policy Challenges in the Philippines Recent Monetary Policy Actions in the Philippines Monetary policy refers to the actions taken by a central bank (BSP) to manage the supply of money and interest rates to achieve specific economic objectives, such as controlling inflation, managing unemployment, and stabilizing the currency. Central Banks, such as the Federal Reserve in the United States, the European Central Bank in the Eurozone, and the Bank of England, play a critical role in the functioning of modern economies. Monetary Policy Tools Open Market Operations (OMO) - The buying and selling of government securities by the central bank to control the money supply. Buying securities increases the money supply, and selling securities reduces it. Interest Rates: Central banks influence short-term interest rates, particularly the policy or discount rate, which impacts borrowing costs in the broader economy. Reserve Requirements: Central banks may require commercial banks to hold a certain percentage of their deposits in reserve, impacting the banks’ lending capacity. Quantitative Easing (QE): A non-traditional monetary policy tool where a central bank buys long-term securities to inject liquidity into the economy. Key Roles of the BSP in Monetary Policy Price Stability Economic Growth Financial Stability Foreign Exchange Management Key Roles of the BSP in Monetary Policy Price Stability: The BSP aims to maintain low and stable inflation, targeting an inflation rate of 2% to 4% annually. Price stability ensures that the purchasing power of the peso remains stable, which is essential for long-term economic growth. Economic Growth: By controlling inflation and stabilizing the financial system, the BSP helps foster an environment conducive to sustainable economic growth. The central bank strives to balance the need for economic expansion with its primary goal of price stability. Financial Stability: The BSP also ensures the stability of the financial system by regulating banks and other financial institutions, mitigating systemic risks, and preventing financial crises. A sound financial system supports efficient credit flow, which is critical for economic activity. Foreign Exchange Management: The BSP is also responsible for managing the country’s foreign exchange reserves and ensuring the stability of the Philippine peso. This includes interventions in the foreign exchange market to stabilize the currency when necessary. Monetary Policy Framework in the Philippines Inflation Targeting Monetary Policy Decision Making Transmission Mechanism Monetary Policy Framework in the Philippines: The BSP has a flexible inflation targeting framework, meaning that it adjusts monetary policy to achieve a stable inflation rate. The BSP’s inflation targets are typically set for a period of two to three years. Inflation Targeting: The BSP uses inflation targeting to guide monetary policy decisions. It aims for an annual inflation rate of 2% to 4%. This target is designed to anchor inflation expectations and provide a clear signal to businesses, investors, and consumers. Monetary Policy Decision Making: The BSP’s Monetary Board is responsible for setting monetary policy. The Board meets regularly to review economic conditions, including inflation trends, economic growth, and global factors, to determine whether monetary policy needs to be adjusted. Transmission Mechanism: The effects of monetary policy decisions are transmitted to the economy through various channels. Changes in interest rates influence consumer spending, investment, and borrowing. These in turn affect aggregate demand, inflation, and overall economic activity. Monetary Policy Challenges in the Philippines Inflation Volatility Global Economic Conditions Political Factors Managing Growth And Stability Monetary Policy Challenges in the Philippines Inflation Volatility: The Philippines has historically faced inflation volatility due to factors like fluctuations in global oil prices, weather conditions (which can affect food supply), and external economic shocks. The BSP has to be adaptive to such changes. Global Economic Conditions: External factors, such as global financial market instability, changes in the prices of key imports (e.g., oil), and shifts in global trade patterns, can impact the Philippine economy and its inflation outlook. Political Factors: The BSP operates independently, but political pressures may sometimes arise, especially during times of economic difficulties. Maintaining credibility and ensuring that monetary policy decisions are made based on sound economic principles is essential. Managing Growth and Stability: The BSP must carefully balance promoting economic growth while controlling inflation. During periods of high growth, inflationary pressures can rise, requiring the BSP to adjust its policy stance.  Recent Monetary Policy Actions in the Philippines Inflation Targeting Adjustments: In response to global commodity price shocks and domestic factors, the BSP has occasionally adjusted its policy stance, raising interest rates or using other tools to ensure inflation remains within the target range. COVID-19 Pandemic Response: During the COVID-19 pandemic, the BSP implemented an expansionary monetary policy to support the economy. It reduced policy interest rates to historically low levels, lowered the reserve requirement for banks, and launched various liquidity-boosting measures to help businesses and consumers. Managing Exchange Rate Volatility: The BSP has occasionally intervened in the foreign exchange market to stabilize the Philippine peso, especially during periods of extreme volatility driven by global economic conditions. Conclusion Monetary policy in the Philippines, led by the Bangko Sentral ng Pilipinas, plays a crucial role in maintaining price stability, supporting economic growth, and ensuring the overall financial system’s stability. By using various monetary policy tools, including interest rate adjustments and open market operations, the BSP helps mitigate inflationary pressures and stabilize the economy. However, the BSP faces challenges such as external shocks and inflation volatility, and it must remain adaptable to the changing economic landscape. Understanding the BSP’s monetary policy framework is essential for grasping how the central bank influences the broader economy and how it contributes to the nation's financial health.  QUIZ -15 ITEMS NEXT WEEK TRUE OR FALSE ONLY