PHILIPPINE

MONETARY POLICY
CHAPTER 5 OF MONETARY POLICY AND CENTRAL BANKING
 Learning Objectives
Students will able to define what is monetary
and its objective
Students will able to identify the different
framework that the BSP undergone.
Students will able to gain more knowledge
about Monetary policy and Central Banking.
Students will able to differentiate Fiscal Policy
to Monetary Policy and their respective
functions in the economy.
Students will able to understand how
significant these policies in a country.
MONETARY POLICY
AND ITS OBJECTIVES

JOYCE C. JORGIO
 Monetary Policy
Involves the regulation of the following:
◦ Money Supply
◦ Credit
◦ Interest Rates
to Control the level of spending in the economy.
It influences the general price and the level of
liquidity in the economy.
It is a measure or action undertaken by central banks
Manages Economic Growth and Inflation by
balancing liquidity.
Philippine Monetary Policy
It is in the primary duty of the
Bangko Sentral ng Pilipinas (BSP)
 Economic Policy
1) Monetary Policy
2) Fiscal Policy
BSP’s Monetary Policy
Itsprimary objective is:
◦ To Promote a low and stable inflation
conducive to a balanced and sustainable
economy.
This aims at influencing the Timing, Cost and
Availability of Money and Credit to stabilize
price levels
Objectives of Monetary Policies
Generally, Central Banks have three Monetary
Policy Objectives, with specific targets for each
varying from one country to another.
1. Managing Inflation
◦ To prevent inflation, it reduces liquidity. On
the other hand, to further economic growth, it
increases liquidity.
2. Reducing Employment
3. Promoting Moderate Long - term interest
rates
 Two types of Monetary Policy
Expansionary
◦ Refers to a monetary policy setting that intends to
increase the level of liquidity/money supply which
could result in a relatively higher inflation in the
economy.
◦ It encourages economic activity as more funds are
available for lending by banks to business
investors which increases aggregate demand which
fuels inflation in the economy.
 Money Supply
Increases

Interest Rates Falls

Expansionary
Monetary
Investment Increases
Policy
Aggregate Demand
Increases

Aggregate Output Price Levels

Increases Increases
 Two types of Monetary Policy
Contractionary
◦ Refers to a monetary policy setting that intends to
decrease the level of liquidity/money supply which
could result in a relatively lower inflation in the
economy.
◦ It tends to limit economic activity as lees funds are
available for lending by banks to business investors
which decreases aggregate demand which tempers
inflation in the economy.
 Money Supply
Decreases

Interest Rates
Increases Contractionary
Monetary
Investment Decreases
Policy
Aggregate Demand
Declines

Aggregate Output Price Levels

Decreases Decreases
 Advantages of Monetary Policy
 Expansionary monetary policy makes it possible for
more investments come in and consumers spend more.
◦ With the banks lowering the interest rates on mortgages and
loans, more business owners will be encouraged to expand
their businesses since they are more available funds to borrow
with interest rates that they can afford. On the other hand,
prices of commodities will be lowered and the buying public
will have more reason to buy more consumer goods.
 Lowered interest rates also lower mortgage payment
rates.
◦ Another advantage of monetary policy in relation to lowered
rates is that it also affects the payments home owners need to
meet for the mortgage of their homes. Reduced mortgage fees
will leave home owners more money to spend.
 Advantages of Monetary Policy
 It allows the Central Bank to apply quantitative
easing.
◦ The central bank can make use of this policy to print or create
more money which enables it to purchase government bonds
from banks. The end result is increased cash reserves in banks
and also monetary base. This also leads to reduced interest
rates and more money for the bank to lend its borrowers.
 It promotes predictability and transparency.
◦ Supporters say that policymakers are obliged to make
announcements that are believable to business owners and the
consumers when it comes to the type of monetary policy to be
expected in the coming months for it to be a success.
 Limitations of Monetary Policy
Unorganized Money Market.
◦ Local money lenders which are not under any
obligation to implement monetary policy.
Non – Monetized Sector.
◦ Barter system where goods are exchange for
goods and money are not used.
Less importance of Demand deposit.
◦ Large amount are kept as cash and very little
amount is deposited as demand deposit.
 Limitations of Monetary Policy
Black Money
◦ Unaccounted money kept as cash and not
deposited with banks (not recorded for tax
purposes)
Deficit Financing.
◦ Measures monetary policy like credit
contraction or reduction of many supply may
not work.
Rate of Interest.
◦ Large amount are kept as cash and very little
amount is deposited as demand deposit.
 Limitations of Monetary Policy
Illiteracy and Less development of
banking.
◦ Illiterate people may not use banking
services
Non – Banking Financial Institution.
◦ May not follow the monetary policy.
Philippine Monetary Policy
Bangko Sentral ng Pilipinas (BSP)
Given the authority to provide policy directions in
the monetary, banking, and credit systems of the
Philippines. Assigned by Republic Act No. 265.
 It exists:
• To supervise operations of bank and to
regulate the non – bank financial institutions,
as well as to aggregate demand from growing
rapidly or growing slowly.
Philippine Monetary Policy
Bangko Sentral ng Pilipinas (BSP)
 It’sPrimary objective over the years:
• Price and inflation stability, leading the
country to a balanced economic growth.
MONETARY AGGREGATE
TARGETING
 MODIFIED MONETARY
AGGREGATE TARGETING
INFLATION TARGETING
 Inflation Targeting
 The ideal inflation rate is measured through the
Consumer Price Index, as the ultimate end goal of
the monetary Policy under this framework is Price
Stability.
 Consumer Price Index
• Measures changes in the prices paid by
consumers for a basket of goods and services.
Cost of Market in current period.

Consumer Price Index in Current

period.

Cost of Market basket in base

period.
Inflation Targeting
 The Philippine Inflation target is measured
through Consumer Price Index. Under the inflation
targeting framework, the government’s annual
headline inflation target has been retained at 3.0
percent ± 1.0 percentage point (ppt) for 2024–
2028 by the Development Budget Coordination
Committee.
 Important Features of Inflation
targeting approach, according to BSP:
 Simple Framework which can, therefore, be easily
understood by public.
 Allow greater focus on the goal of price stability.
 Forward looking and recognizes that monetary
policy actions affect inflation with a lag.
 Reflects Comprehensive approach to policy.
 Promotes transparency in conduct of monetary
policy through the announcement of targets and
the reporting measures that the BSP will adopt to
attain these targets, as well as the outcomes of its
policy decisions;
 Important Features of Inflation
targeting approach, according to
BSP:
 Increases the accountability of money authorities
to the inflation objective; and
 Does not depend on the assumptions of a stable
relationship between money, output, and prices,
and can still be implemented even when there are
shocks that could weaken the relationship. This
approach is deemed successful if it adheres to the
following preconditions set by BSP:
• Firm Commitment to Price Stability.
• Central Bank Independence.
• Good Forecasting ability.
Important Features of Inflation
targeting approach, according to
BSP:
• Firm Commitment to Price Stability.
• Central Bank Independence.
• Good Forecasting ability.
• Transparency
• Accountability
• Sound Financial System
 Interest Rate Corridor System

 On 3 June 2016, the BSP formally adopted an

Interest Rate Corridor System
 The IRC system as a framework for conducting
its monetary operations. The IRC is a system for
guiding short-term market rates towards the BSP
policy interest rate which is the overnight reverse
repurchase (RRP) rate. It consists of a rate at which
the central bank lends to banks(typically an
overnight lending rate) and a rate at which it takes
deposits from them (deposit rate).

MARY ANGELIE OLOGUIN

 Interest Rate Corridor System

 In a standard corridor, the

lending rate will be above
the CB target/policy
rate(thereby forming an
upper bound for short-term
market rates), and the
deposit rate will be below
the CB policy rate (there by
forming the lower bound).
 Money Supply Indicator

Central banks use money supply

indicators to predict future Behaviour
of prices and making plans according
to the current economic activity.
Money Supply
◦ Refers to the amount of money in circulation in the
economy.
◦ Comprises of:
 M1 or Narrow Money = the currency in circulation
(those outside depository corporations and
peso demand deposits). Narrow money is money in
circulation. This includes cash circulating among the
people, both in coins and bills, peso demand
deposits, tourist checks from non- bank issuers, and
other currency in check form
 M2 or Broad Money = which consists of M1,
peso savings and time deposits Broad money
encompasses all that M1 does, along with peso
savings deposits, time deposits, and mutual funds
balances.
 M3 or Broad Money Liabilities = which
consist of M2 plus peso deposit substitutes
such as promissory notes and commercial
papers (securities). This indicator includes M2
money supply along with money substitutes,
i.e., promissory notes and commercial papers.

 M4 or Liquidity = consist of M3 plus

transferrable and other deposits in foreign
currency. Money Liquidity money includes all
of M3 along with transferable deposits,
treasury bills, and deposits held in foreign
currency, which are all short-term and highly
Monetary Policy Instruments

In order for the BSP to make use of the

money supply indicators and achieve
the inflation target, it utilizes a variety
of instruments to implement its
monetary stance.
 Open Market Operations

This is the sale or purchase of

government securities by the Bangko
Sentral to withdraw or inject liquidity
into the system. Open Market Operations
consist of repurchase and reverse
repurchase transactions, outright
transactions, and foreign exchange swaps.
 Open Market Operations

This is the sale or purchase of government

securities by the Bangko Sentral to
withdraw or inject liquidity into the system.
Open Market Operations consist of:
◦ Repurchase and reverse repurchase
transactions,
◦ Outright transactions; and
◦ Foreign exchange swaps.
 Repurchase and Reverse
repurchase transactions
This is carried out through the Repurchase
Facility and Reverse Purchase Facility of
the Bangko Sentral ng Pilipinas.
In Purchase transactions. the Bangko
Sentral buys government securities with a
dedication to sell it back at a specified
future date. and at a predetermined interest
rates.
 Repurchase and Reverse
repurchase transactions
The BSP’s payment increases reserve
balances and expands the monetary supply
in the Philippines. On the other hand, in
reverse repurchase the government acts as
the seller and works to decrease liquidity of
money.
These transactions usually have maturities
ranging from overnight to one month.
 Outright Transactions

Unlike, Repurchase and Reverse repurchase

transactions there is no clear intent by the
government to reverse the action of their
selling/buying of monetary securities .
 Foreign Exchange Swaps

This refers to the actual exchange of two

currencies at a specific date, at a rate agreed
upon the deal date and the reverse exchange
of the currencies at a farther ate in the
future, also at an interest rate agreed on deal
date.
 Acceptance of Fixed – term
Deposits
 This method was introduced by the BSP in 1998 to expand
its liquidity management. In the Special Deposits Account,
or SDA, consists fixed terms deposits by banks and
institutions affiliated with the BSP. With the adoption of the
IRC system in 2016, the SDA facility was replaced by the
term deposit auction facility (TDF).

 The TDF is a key liquidity absorption facility used by the

BSP for liquidity management and used to withdraw a large
part of the structural liquidity from the financial system to
bring market rates closer to the BSP policy rate.
 Standing Liquidity Facilities
 The BSP offers standing liquidity (lending and deposit)
windows that help counterparties adjust their liquidity
positions at the end of the day. The two standing
facilities that form the upper and lower bound of the
corridor are set at ± 50 basis points (bps) around the
target policy rate (the overnight RRP rate under the new
IRC structure).

 The standing overnight liquidity facilities are available

on demand to qualified counterparties.
 Term Deposit Facility
 The Term Deposit Facility is a key liquidity absorption
facility, commonly used by CBs for liquidity
management.

 The BSP offers two tenors - seven days and 28 days - in

its term deposit. Pre - termination is prohibited for the
7-day tenor but is allowed for the 28-day tenor after a 7-
day holding period at the appropriate pre-termination
rate. The TDF auction will be operated using a variable-
rate, multiple price tender (English auction).
 Rediscounting
 The BSP extends discounts, loans and advances to banking institutions
in order to influence the volume of credit in the financial system.

 The rediscounting facility has two categories namely, Peso

Rediscount Facility and Exporters Dollar and Yen Rediscount
Facility.

 The Peso Rediscount Facility interest rates are based on the latest
available BSP overnight lending rate plus the applicable term premia
per Circular No. 964 dated 27 June 2017. The EDYRF interest rates
are based on the 90-day London Inter Bank Offered Rate for the last
working day of the immediately preceding month plus 200 basis
points plus the applicable term premia for loan maturities exceeding
90 days pursuant to Circular No. 807 dated 15 August 2013.
Reserve Requirements
 They always need to maintain a certain balance of money,
which are called "reserves".
 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.
 Reserve requirements are imposed on the peso liabilities
of universal/commercial banks, thrift banks, rural banks
and cooperative banks, and non-bank financial institutions
with quasi-banking functions.
Fiscal Policy
Fiscal policy is a macroeconomic policy
that involves changes to government
spending in taxation in order to influence
aggregate demand in the economy.

MINERVA NUNEZ
Objectives of Fiscal Policy
Removal of unemployment
◦ increases govt. expenditure and
reduces taxes.
Objectives of Fiscal Policy
Maintenance of economic
development
◦ increase the rate of capital formation.
Objectives of Fiscal Policy
Maintenance of price stability
◦ reduce aggregate demand by reducing
exp. And increasing direct and indirect
taxes. Reduction in economic inequality-
more taxes on rich
Objectives of Fiscal Policy
Credit control
◦ increase and decrease interest rates.
Objectives of Fiscal Policy
Reduction in economic
inequalities
◦ distribution of income and wealth.
Fiscal Policy Stances
ContradictoryFiscal Policy
Expansionary Fiscal Policy
Fiscal Policy Stances
Contradictory Fiscal Policy
◦ Reduce inflation
◦ Reduce budget deficit
◦ Redistribute income
◦ Reduce current account deficit
Fiscal Policy Stances
Expansionary Fiscal Policy
◦ Boost growth
◦ Reduce unemployment
◦ Increase inflation
◦ Redistribute income
Fiscal Function
A fiscal function is a government
function that involves the spending or
raising of revenue. Fiscal functions can
be divided into two broad categories:
Spending and Revenue.

JAMAICA MOSQUEDA
Fiscal Functions
Spending.
◦ involve the expenditure of funds by the
government in order to provide goods and
services to the public.
Revenue.
◦ involve the collection of taxes and other
revenues by the government in order to
finance its spending.
Four Major Fiscal Functions of
the Government:
1. Allocation Function
◦ The provision for social goods, or the
process by which total resource use is
divided between private and social goods
and by which the mix of social goods is
chosen.
Four Major Fiscal Functions of
the Government:
2. Distribution Function.
◦ Adjustment of the distribution of income
and wealth to assure conformance with
what society considers a ‘fair’ or ‘just’
state of distribution.
Four Major Fiscal Functions of
the Government:
3. Stabilization Function.
◦ Fiscal policy is needed for stabilization,
since full employment and price level
stability do not come about automatically
in a market economy.
Four Major Fiscal Functions of
the Government:
4. Economic Growth Function.
◦ The effects of fiscal policy upon the rate
of growth of potential output must also be
allowed for.
 Fiscal Functions
Fiscal Functions in Developing
Countries:
◦ In a newly developing economy is the
promotion of highest possible rate of
capital formation.
◦ Fiscal policy must be blended with
planning for development.
 Fiscal Functions
Fiscal Functions in Developing
Countries:
◦ Protecting the economy from high
domestically and unhealthy
developments abroad.
◦ Not only an expansionary budget but
a deficit is desirable too in a
developing country.
 Main Objectives of Fiscal Policy
For less developed countries, the following main
objectives of fiscal policy may be restated as:
◦ To increase the rate of investment and capital
formation, so as to accelerate the rate of economic
growth.
◦ To increase the rate of savings and discourage
actual and potential consumption.
◦ To diversify the flow of investments and
spending from unproductive uses to socially most
desirable channels.
 Main Objectives of Fiscal Policy
For less developed countries, the following
main objectives of fiscal policy may be
restated as:
◦ To check sectoral imbalances
◦ To reduce widespread inequalities of
income and wealth.
◦ To improve the standard of living of the
masses by providing social goods on a
large scale.
 COORDINATING
FISCAL POLICY AND MONETARY POLICY

JALENE ROSE MOLENO

 Monetary Policy
Monetary policy addresses interest
rates and the supply of money in
circulation, and it is generally managed
by a central bank.
 Fiscal Policy
Fiscal policy addresses taxation and
government spending, and it is
generally determined by government
legislation.
Coordinating Fiscal and Monetary
Policy
Both monetary and fiscal policies are used
to regulate economic activity over time.
They can be used to accelerate growth when
an economy starts to slow or to moderate
growth and activity when an economy starts
to overheat.
Coordinating Fiscal and Monetary
Policy
The overarching goal of both monetary and
fiscal policy is normally the creation of an
economic environment where growth is
stable and positive and inflation is stable
and low.
Coordinating Fiscal and Monetary
Policy
The aim is therefore to steer the underlying
economy so that it does not experience
economic booms that may be followed by
extended periods of low or negative growth
and high levels of unemployment.
Coordinating Fiscal and Monetary
Policy
While Fiscal and Monetary Policies are
different from each other, they are closely
interrelated and need to be coordinated.
This means that the attainment of fiscal
policy goals can be wiped out by monetary
policy effects and vice – versa.
Coordinating Fiscal and Monetary
Policy
In conclusion, Fiscal policy and monetary
policy are the two tools used by the state to
achieve its macro economic objectives.
While for many countries the main
objective of fiscal policy is to increase the
aggregate output of the economy, the main
objective of the monetary policies is to
control the interest and inflation rates.
Coordinating Fiscal and Monetary
Policy
The IS/LM model is one of the models used
to depict the effect of policy interactions on
aggregate output and interest rates. The
fiscal policies have a direct impact on the
goods market and the monetary policies
have a direct impact on the asset markets;
Coordinating Fiscal and Monetary
Policy
Since the two markets are connected to
each other via the two macro variables
output and interest rates, the policies
interact while influencing output and
interest rates
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