monetary policy - philippines

What is monetary

policy?

… refers to the measures or actions taken by the central bank to influence the general price level and the level of liquidity in the economy.

Source: www.bsp.gov.ph

Objective of the Monetary Policy

To promote a low and stable inflation conducive to a balanced and sustainable economic growth.


Settings of Monetary Policy

Expansionary

Intends to increase the level of liquidity/money supply in the economy and which could result in a relatively higher inflation path for the economy.

Contractionary

Intends to decrease the level of liquidity/money supply in the economy and which could also result in a relatively lower inflation path for the economy.


In cases of unemployment, recession, and deflation - Remedy is to increase money in circulation and inducing

spending.

Government actions: buying bonds in the open market and reducing interest rates.

In times of inflation -

Remedy is to reduce money in circulation.

Government actions: selling bonds in the open market and increasing interest rates.

Open Market Operations

- the sale or purchase of government securities by the BSP to

withdraw liquidity or inject liquidity into the system.

Monetary Policy Instruments

• Primary: overnight reverse repurchase (borrowing rate) and overnight repurchase * (lending) rate;• Raisings policy/reducing the BSP’s policy

interest rates;• Increasing/decreasing the reserve

requirement;• Encouraging/discouraging deposit in the

special deposit account (SDA)* facility by banks and trust entities of BSP-supervised financial institutions;• Increasing/decreasing rediscount rates• Outright sales/purchases of the BSP’s

holdings of government securities.

* As of 3June 2016, replaced with overnight lending facility (OLF) and overnight deposit facility (ODF), respectively.


BSP Terms:

• Reverse Repurchase Rate (RRR) - the policy rate at which the BSP borrows from banks with government securities as collateral.• Reserve Requirement – the proportion of banks’ deposits and deposit

substitute liabilities that banks are required to hold as reserves.• Special Deposit Accounts (SDA) – fixed term deposits with the BSP by

banks and trust entities of BSP-supervised financial institutions .• Rediscounting – a special refinancing facility of central banks wherein

a financial institution borrows money from the BSP using promissory notes and other loan papers of its borrowers as collateral.


Previous Monetary Policy Frameworks:• Past. Monetary aggregate

targeting approach - control of inflation by targeting money supply. (Measuring the volume of money in circulation.)• Adopted January, 2002. Inflation

targeting – focused mainly on achieving price stability. Entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period.


Current Monetary Policy Framework – Interest Rate Corridor (IRR) System (adopted 3 June 2016)

A system for guiding short-term market interest rates towards the central bank (CB) target/policy rate.


Features of the BSP’s IRC system


Instruments under the IRC System -

1. Open Market Operations (OMO)• Reverse Repurchase/Repurchase transactions• Outright purchases and sales of securities• Foreign exchange swaps

2. Acceptance of term deposits• Term Deposit Facility (TDF)

3. Standing Liquidity Facilities• Overnight Deposit Facility• Overnight Lending Facility


Source: www.bsp.gov.phHistorical Auction Results

monetary policy - philippines

Economy & Finance