Monetary and Fiscal Policy

Monetary Policy

refers to thesteps taken by a country’s central bank to control the money supply for economic stability. For example, policymakers manipulate money circulation for increasing employment, GDP, price stability by using tools such as interest rates, reserves, bonds, etc.

Contractionary

when there is “too much money” in th economy supporting overall demand for goods and services hich, in turn, increases inflationary pressures, the BSP “tighten” the faucet to reduce the moeny supply. This actions dampens demand hich could lead to lower inflation.

• higher interest rates

• less lendin/savings

• more savings

• less spending

Expansionary

When there is “too little money” in the economy which dampens overall demands for goods and service, the BSP “loosens”, the faucet to expand money supply.

• lower interest rate

• more leding /borrowing

• less savings

• more spending

Also known as loose monetary policy. It increases the supply of money and credit to generate economic growth.

Open Market Operations (OMO)

Refers to a central bank buying or selling short-term Treasury’s and other securities in the open market in order to influence the money supply, thus influencing short-term interest rates.

Selling securities from the central bank's balance sheet removes money from the system, making loans more expensive and increasing rates. Manipulate Interest Rates

Reserve Requirements

refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP which they cannot lend out, or where available through reserve-eligible government securities. Changes in reserve requirements have a significant effect on money supply in the banking system, making them a powerful means of liquidity management by the BSP.

Reserve requirements are imposed on the peso liabilities of the following banks:

a. Commercial/Universal Banks

b. Thrift Banks

c. Rural Banks

d. Cooperative Banks

e. Non-bank financial institutions with quasi-banking

functions (NBQBs).

Discount Rate

refer to either the interest rate that the Federal Reserve charges banks for short-term loans or the rate used to discount future cash flows in discounted cash flow (DCF) analysis

Pillars of Central Banking

Price Stability, Financial Stability, and Efficient Payments and Settlement Sytem

Price Stability

o Through the conduct of monetary policy

o BSP’s primary mandate

o Low and stable inflation

o Preserves purchasing power

Financial Stability

o Financial system is able to effectively

distribute and manage funds

Efficient Payments and Settlement System

o Matrix of institutional and infrastructure

arrangements and processes through which

money is transferred from one party to

another

o Makes transfer of funds easier

Bangko Sentral ng Pilipinas

Owner and operator of Philippine Payments and Settlements Systems (PhilPaSS)

Philippine Payment and Settlements System (PhilPASS)

o Real time gross-settlement system

o Settlement is done thru the member-bank’s

demand deposit account maintained by the BSP