Monetary Policy And Credit - Banking Week 2 PDF

MONETARY POLICY AND CREDIT BANKING WEEK 2  The Central Bank of the Philippines, known as the Bangko Sentral ng Pilipinas (BSP), utilizes several key tools of monetary policy to achieve its objectives, particularly price stability and financial stability.  TOOLS OF MONETARY POLIC...

MONETARY POLICY AND CREDIT BANKING WEEK 2  The Central Bank of the Philippines, known as the Bangko Sentral ng Pilipinas (BSP), utilizes several key tools of monetary policy to achieve its objectives, particularly price stability and financial stability.  TOOLS OF MONETARY POLICY 1. Open Markets and Their Operations- Open market operations take place when the central bank, on its own volition and in order to adjust the size and/or composition of its holdings of freely negotiable securities, buys or sells securities in a market which is open to all who want to buy or sell financial assets.  The BSP buys or sells government securities in the open market to influence the amount of money in the banking system. When the BSP sells securities, it absorbs liquidity (contractionary policy), and when it buys securities, it injects liquidity (expansionary policy). 2. Reserve Requirement The BSP sets the reserve requirement ratio, which is the percentage of deposits that banks must hold in reserve and not lend out. By increasing the reserve requirement, the BSP can reduce the money supply (contractionary), while lowering it can increase the money supply (expansionary).  An increase in requirements forces banks to purchase temporary liquidity from the central bank, raising their costs, and reduces their lending activity, lowering the public's deposits. Conversely, a reduction allows an expansion in deposits for any given monetary base.  BSP Reduces Reserve Requirements Effective 30 June 2023 Reservable Liabilities UBs/KBs Digital Banks a. Demand Deposits 9.5% 6% b. NOW accounts 9.5% 6% c. Savings Deposits (excluding basic deposit accounts) 9.5% 6% d. Time Deposits, Negotiable CTDs, Long-Term 3. Policy Interest Rates (Overnight Lending and Borrowing Rates): The BSP uses policy interest rates, particularly the overnight reverse repurchase (RRP) rate, to signal the stance of monetary policy. Lowering the rate can encourage borrowing and spending (expansionary), while raising the rate can help cool down the economy and control inflation (contractionary). The BSP lends money to banks with government securities as collateral. Money parked at the BSP is moved to the banks, and eventually, to the public. 4. Term Deposit Facility The TDF is a tool used by the BSP to manage liquidity in the financial system. Banks can deposit excess funds in the BSP for a fixed term. By offering attractive rates on these deposits, the BSP can absorb excess liquidity and manage short-term interest rates. The TDF is a liquidity absorption facility used by the BSP for active liquidity management. Counterparties are asked to submit bids (volume and rate) for term placements with the BSP. Currently, the BSP offers three tenors—seven, 14, and 28 days—in term deposit auction. 5. Special Deposit Account (SDA): Similar to the TDF, the SDA is a facility where banks can place their excess reserves at the BSP. It is another tool to manage liquidity and influence money market rates. The special deposit account is the bank settlement account opened by the depositor according to the laws and administrative regulations and rules for the management or use of its special-purpose fund. Features. Special deposit account applies to receipt and payment of the special funds. 6. Rediscounting Facility: This facility allows banks to borrow from the BSP by presenting eligible loan papers (like promissory notes) as collateral. By rediscounting these papers, banks can access additional funds, which influences the overall money supply. Rediscounting 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. 7. Foreign Exchange Operations: The BSP intervenes in the foreign exchange market to stabilize the peso's exchange rate by buying or selling foreign currency. This tool helps manage inflationary pressures resulting from exchange rate fluctuations. The BSP's goal is clear: to promote price stability consistent with balanced, sustainable and inclusive growth. SECOND, WHEN THE BSP BUYS FOREIGN EXCHANGE, IT PAYS IN PESOS. THIS INCREASES THE AMOUNT OF PESOS CIRCULATING IN THE PHILIPPINE ECONOMY.  Inclusive growth means economic growth that creates employment opportunities and helps in reducing poverty. It means having access to essential services in health and education by the poor. It includes providing equality of opportunity, empowering people through education and skill development. 8. Moral Suasion: Although not a direct tool, moral suasion refers to the BSP's use of influence and persuasion to encourage banks and financial institutions to follow certain guidelines or policy directions without formal regulation.