Monetary

• Monetary policy


  The way the central bank controls the supply and availability of money, the cost of money, and the rate of interest
• Fiscal policy


  Government spending and taxes
• Monetary policy and fiscal policy allow the government to influence the economy, control inflation, and stabilize currency
• Monetary policy tools


  • Open market operations
  • Interest rate adjustments
• Money supply indicators


  M1, M2, M3, etc.
• Money supply indicators can help predict the government's intentions in regulating the economy and the consequences that result from it
• Objective of monetary policy


  To promote low and stable inflation conducive to balanced and sustainable economic growth
• The Bangko Sentral ng Pilipinas (BSP) holds monetary policy meetings eight times a year to decide on the appropriate monetary policy stance
• Main instruments of monetary policy in the Philippines


  • Open-market operations
  • Reserve requirements
  • Special deposit facility for banks
• The BSP has tended to act on the side of caution, keeping base money well below its targeted ceilings, and has relied on a broader set of indicators to guide monetary policy
• Role of Bangko Sentral ng Pilipinas (BSP)


  Responsible for regulating the supply and availability of money, the cost of money, and the interest rate
• The BSP's primary objective is to promote low and stable inflation conducive to balanced and sustainable economic growth
• The BSP achieves its objective through the adoption of an inflation targeting framework for monetary policy, which was implemented in January 2002
• The BSP's monetary policy is guided by the Monetary Board, which holds meetings every six to eight weeks to decide on the appropriate monetary policy stance
• Main instruments of monetary policy used by the BSP


  • Open-market operations
  • Reserve requirements
  • Special deposit facility for banks
• The BSP undertakes various programs and policy initiatives aimed at enhancing financial inclusion, financial education, and consumer empowerment
• Objectives of monetary policy


  To promote low and stable inflation conducive to balanced and sustainable economic growth
• Price stability


  Achieved when there are no major fluctuations in the prices of general consumer goods over an extended period of time, characterized by a low and stable rate of inflation
• Price stability is important as it reduces uncertainty in the market, makes pricing decisions easier, and allows consumers to make more informed purchasing decisions
• Price stability also helps to avoid random wealth redistribution and supports economic growth, employment, and the ability of people and businesses to plan their savings, spending, and investment more effectively
• Monetary policy contributes to price stability by influencing the supply of money and the cost of borrowing
• Sustainable economic growth


  The ability of an economy to expand and improve over time in a balanced and inclusive manner, without causing negative impacts on the environment or depleting natural resources
• Sustainable economic growth aims to create decent jobs, improve living standards, and promote full and productive employment for all, while also considering global resource efficiency, inclusive development, and the well-being of the population
• Monetary policy contributes to sustainable economic growth by promoting a stable and predictable economic environment
• Monetary policy can encourage investment, business activities, and consumer spending, thereby fueling economic growth
• How monetary policy impacts the Philippine economy


  • Influence on price level
  • Stimulating economic growth
  • Controlling inflation
  • Employment
  • Interest rates
  • Economic development and welfare
• Expectations


  The expectations of participants in the real economy can influence the 'long and variable' lags of monetary policy
• Lags


  The time delay between when a monetary policy action is taken and when its effects are felt in the economy
• The economic impact of monetary policy tightening by the Philippine central bank will have a long lag and be felt into the next year
• Causes of lags


  • Contract length: Buyers and sellers may set prices and quantities in advance of an unanticipated change in monetary policy
  • Sequence of shocks that the economy encounters
• Two recent estimates from U.S. central bankers put the time that it takes for changes in monetary policy to affect inflation at 18 months to two years and at nine months to a year
• Factors affecting the impact of monetary policy


  • Expectations
  • Transmission mechanisms
  • Time lags
  • Fiscal policy interaction
  • Nature and frequency of shocks
• The Monetary Policy Report (MPR) is a publication of the Bangko Sentral ng Pilipinas (BSP) on monetary policy, launched in February 2022
• The latest Monetary Policy Report (MPR) of the Philippines was published in August 2023
• At its monetary policy meeting on 17 August 2023, the BSP decided to keep the interest rate on the overnight reverse repurchase (RRP) facility at 6.25 percent
• The latest baseline inflation forecasts are higher compared to the previous round, with inflation projected to average at 5.6 percent for 2023; 3.3 percent for 2024; and 3.4 percent for 2025
• The inflation path is still projected to return to the target range in Q4 2023 in the absence of further supply-side shocks
• Estimated negative base effects until January 2024 will be favorable for the inflation path, attributed primarily to the normalization of global commodity prices after the sharp uptick in March 2022
• The weaker GDP outturn for Q2 2023 reflected a broad-based slowdown in domestic economic activity
• Inflation is seen to decelerate near the midpoint of the target in Q4 2023 at 3.4 percent and approach the lower end of the target in Q1 2024 at 2.4 percent