MONETARY BANKING: SUPPLY OF MONEY

Monetary Policy

• actions taken by central bank(BSP) to manage supply of money and interest rates to achieve specific economic objectives

  • Economic Objectives e.i 

    • controlling inflation, managing unemployment, and stabilizing the currency

Monetary Policy Tools

• Open Market Operations

• Interest Rates

• Reserve Requirements

• Quantitative Easing

Open Market Operations (OMO)

• buying/selling of gov’t securities to control money supply

• buying = increasing money supply; selling = reduces it.

Interest Rates

• Central banks (CB) influence short-term interest rates i.e. policy or discount rate 

• impacts borrowing costs in the broader economy

  • e.g. pwd/senior citizen discount???

Reserve Requirements

CB require commercial banks to hold a certain percentage of their deposits in reserve, impacting lending capacity of the banks

Quantitative Easing (QE)

• non-traditional policy tool

• CB 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

Price Stability

• BSP aims maintain low and stable inflation

  • Target Inflation Rate annually: 2-4%

• ensures purchasing power of peso stable; essential for long-term economic growth

  • primary goal is price stability

Economic Growth

• by control inflation and stabilize financial system

• BSP helps foster environment conducive to sustainable growth

  • strives balance needed for economic expansion

Financial Stability

• ensures by regulating banks and other financial institutions, mitigating systemic risks, and preventing financial crises

• Sound Financial System support efficiency credit flow which critical for economic activity

Foreign Exchange Management

• BSP is responsible for managing foreign exchange reserves and ensuring the stability of Philippine peso

• includes intervention  in the foreign exchange market to stabilize currency if necessary

List of Monetary Policy Framework in the Philippines

• Inflation Targeting

• Monetary Policy Decision Making

• Transmission Mechanism

Monetary Policy Framework in the Philippines

• BSP has a flexible inflation targeting framework

  • it adjusts policy to achieve stable inflation rate

  • inflation targets is typically 2-3 years period set

Inflation Targeting

• use to guide monetary policy decisions

• aims annual inflation rate: 2-4%

• designed to anchor expectations and clear signal to businesses, investors, and consumers

Monetary Policy Decision Making

• Monetary Board is responsible for setting monetary policy

  • they meet regularly to review economic conditions, growth, inflation trends, global factors in order to know if monetary policy will need to be adjusted

• Monetary Board

is responsible for setting monetary policy

Transmission Mechanism

• effects of decisions are transmitted to economy from various channels

  • e.g. Changes in interest rates influenced consumer spending, investment, and borrowing = affect the demand, inflation, overall economic activity. 

Monetary Policy Challenges in the Philippines

• Inflation Volatility

• Global Economic Conditions

• Political Factors

• Managing Growth And Stability

Inflation Volatility

• the country faced this due to factors like:

  • fluctuations of global oil prices, weather conditions, and external economic shocks

• has to be adaptive to changes

Global Economic Conditions

• External Factors e.g. global financial market instability, changes in the prices of import (eg oil) 

• impact PH economy and its inflation outlook

Political Factors

• political pressures may sometimes arise esp. times of economic difficulties

• credibility and ensured policy were made based on sound economic principles are essential

Managing Growth and Stability

• BSP must balance promoting economic growth while controlling inflation

Recent Monetary Policy Actions in the Philippines: Inflation Targeting Adjustments

BSP has occasionally adjusted its policy stance, raising interest rates or using other tools to ensure inflation remains within the target range to respond to price shock and domestic factors

Recent Monetary Policy Actions in the Philippines: COVID-19 Pandemic Response

BSP implemented an expansionary monetary policy to support the economy eg. reduced policy interest rates, lowers reserve requirements, launched liquidity-boosting to help businesses and consumers

Recent Monetary Policy Actions in the Philippines: Managing Exchange Rate

Volatility BSP occasionally intervened in the foreign exchange market to stabilize the Philippine peso