MONETARY POLICY

Question 1

Who is the chairman of the monetary board of BSP?

Answer 1

Felipe M. Medalla

Question 2

Who are the members of the monetary board of BSP?

Answer 2

Benjamin E. Diokno
Peter B. Favila
Antonio S. Abacan, Jr.
V. Bruce J. Tolentino
Anita Linda R. Aquino
Eli M. Remolona

Question 3

What are the important responsibilities of the Governor of BSP?

Answer 3

The Governor of the Bangko Sentral ng Pilipinas (BSP) has important responsibilities:

1. Prepare and present policies to the Monetary Board for approval.
2. Implement approved policies and measures.
3. Manage and oversee the operations of the BSP.
4. Appoint and set salaries for personnel below department head level.
5. Make final decisions on matters related to laws and regulations.
6. Exercise other powers granted by the Monetary Board.

Question 4

What are the authorities of the Governor of BSP?

Answer 4

The Governor of the Bangko Sentral ng Pilipinas (BSP) has the authority to:

1) Represent the BSP and the Monetary Board in all interactions with government offices, agencies, private entities, and international organizations.

2) Sign contracts, notes, securities, reports, and other official documents of the BSP.

3) Act as the legal representative of the BSP in legal proceedings, actions, or specialized legal studies, either personally or through authorized counsel.

4) Delegate the power of representation to other officers, while taking personal responsibility.

It is important to note that, to maintain the integrity and prestige of the office, the BSP Governor may choose not to participate in initial discussions with multilateral banking or financial institutions during negotiations for the government. Instead, a permanent negotiator may represent the Governor in such cases.

Question 5

Information about the Governor of BSP

Answer 5

• Name: Felipe M. Medalla, Ph.D.
• Current Position: Governor of the Bangko Sentral ng Pilipinas (BSP)
• Qualifications: Ph.D. in Economics from Northwestern University, M.A. in Economics from the University of the Philippines
• Career: Seasoned economist and educator with over four decades of experience
• Administration: Served under four administrations
• Academic Background: Graduated cum laude from De La Salle University with an economics-accounting degree
• Professional Certification: Certified public accountant

Question 6

What is the objective of BSP?

Answer 6

“to promote price stability conducive to a balanced and sustainable growth of the economy”

Question 7

is focused mainly on achieving a low and stable inflation, supportive of the economy’s growth objective. This approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period.

Answer 7

Inflation Targeting

Question 8

These are a way for the Bangko Sentral ng Pilipinas (BSP) to manage the amount of money in the economy and influence interest rates. It involves the BSP buying or selling government securities in the market. By adjusting the overnight borrowing rate, issuing BSP securities, or directly buying or selling government securities, the BSP can control the availability of money and affect borrowing costs for businesses and individuals.

Answer 8

Open Market Operations (OMOs)

Question 9

Offering term deposits to absorb liquidity

Answer 9

Acceptance of Term Deposits

Question 10

Offering this (deposit and lending) to absorb or provide liquidity at the initiative of the counterparty

Answer 10

Standing Liquidity Facilities

Question 11

The Bangko Sentral ng Pilipinas (BSP) employs additional methods to manage liquidity in the economy. One way is by adjusting the reserve requirement, which determines the portion of bank deposits that banks are required to keep with the BSP, restricting their lending capacity. The BSP can increase or decrease this requirement to control the amount of money available for lending. Another method is by modifying the rediscount rate, which is the interest rate charged on short-term loans provided by the BSP to financial institutions using eligible collateral from bank borrowers. By adjusting this rate, the BSP influences the cost of borrowing for banks and affects lending activities. These liquidity management facilities enable the BSP to regulate the flow of money and maintain stability in the financial system.

Answer 11

Other Liquidity Management Facilities

Question 12

Financial systems are crucial for both individuals and businesses as they help with money flow and contribute to economic growth. Banks, being the main players in the financial system, handle our savings, assist in transferring funds and making payments, and provide loans to support entrepreneurial activities. To ensure that banks operate safely and securely, regulatory frameworks are put in place by banking authorities. These frameworks encourage innovation while ensuring that banks follow established rules. The Global Financial Crisis highlighted the interconnections within the financial system and the need to address risks that can affect society as a whole. As a response, there is now a global effort to manage these risks through macroprudential policy, which aims to safeguard the stability of the financial system and protect against potential negative impacts that may go beyond the intentions of individual entities.

Answer 12

Financial Stability

Question 13

The Bangko Sentral ng Pilipinas (BSP) has a key responsibility of ensuring “Financial Stability” as mandated by the amended BSP Charter. The goal of financial stability is to strengthen the overall resilience of the financial system, protecting it from potential shocks. This involves managing systemic risks that could disrupt the functioning of the financial system, while still providing value to consumers during normal times. Financial stability is a global standard for overseeing the financial system and goes beyond addressing vulnerabilities in individual banks. Macroprudential policy, which focuses on interconnected risks, considers factors beyond just liquidity and inflation. It also takes into account the welfare of society, recognizing that negative outcomes can have a larger impact compared to positive expectations.

Answer 13

Systematic Risk Management

Question 14

is a framework used by financial authorities to maintain and strengthen the stability of the financial system. It defines the principles, policies, and tools employed to address risks that could impact the entire system, known as “systemic risks.” The objective is to enhance the system’s resilience and protect the economy from potential disruptions.

Answer 14

A Macroprudential Policy Strategy Framework

Question 15

These are problems that can occur within the financial system and have the ability to negatively affect the entire economy. Financial authorities, like the Financial Stability Board (FSB), the International Monetary Fund (IMF), and the Bank for International Settlements (BIS), define systemic risks as disruptions in any part of the financial system that can have adverse effects on the rest of the economy. These risks highlight the interconnected nature of the financial system and how issues in one area can spread and impact the overall economic well-being of a country or even globally.

Answer 15

Systematic Risks

Question 16

Why is managing systematic risks important?

Answer 16

Managing systemic risks is crucial because these risks have the potential to harm the entire economy. When a disruption occurs in the financial market and it spreads to affect other sectors of the economy, it becomes systemic. Even though an initial disruption may seem minor, if it grows and impacts other areas, it can pose a significant threat to the overall economic stability. Therefore, it is essential to proactively manage systemic risks to safeguard the economy from potential dangers and ensure its smooth functioning.

Question 17

These are actions taken to manage risks that could affect the entire financial system. Instead of focusing on individual banks or institutions, these policies look at the bigger picture and aim to ensure the overall stability of the financial system. While certain institutions may be considered important, the focus of macroprudential policies is on their impact on the entire system, rather than regulating their daily operations. The goal is to identify and address risks that could have widespread consequences for the financial system and the economy as a whole.

Answer 17

Macroprudential policies

Question 18

Who is the main authority of macroprudential policy in the Philippines

Answer 18

Bangko Sentral ng Pilipinas (BSP)

Question 19

who benefits from having a national strategy framework for Macroprudential policy

Answer 19

Both Individuals and institutions

Question 20

What are the objectives of BSP

Answer 20

1. Maintain price Stability conducive to a balanced and sustainable economic growth
2. Promote and preserve monetary stability and the convertibility of the national currency

Question 21

What are the responsibilities of BSP?

Answer 21

1. Provides policy directions in the areas of money, banking and credit
2. Supervises operations of banks and exercises regulatory powers over non-bank financial institution with quasi-banking functions

Question 22

It was launched in February 2022. It replaces the quarterly publication of the Inflation Report and serves as the flagship BSP publication on monetary policy. The MPR provides the public a detailed view of the BSP’s forecasts as well as guidance on the likely direction of monetary policy over the near term.

Answer 22

Monetary Policy Report

Question 23

The Monetary Board decided to keep the interest rate on the BSP’s overnight reverse repurchase facility at 6.25 percent. Accordingly, the interest rates on the overnight deposit and lending facilities were kept at 5.75 percent and 6.75 percent, respectively.

Answer 23

Monetary Policy Decision

Question 24

The Monetary Board holds monetary policy meetings eight (8) times a year, with meeting intervals of six (6) to eight (8) weeks, to deliberate, discuss, and decide on the appropriate monetary policy stance of the BSP in order to keep inflation within the target.

Answer 24

Calendar of Monetary Policy Meetings

Question 25

Consistent with the disclosure and reporting mechanisms under the Inflation Targeting framework, the BSP publishes the highlights of the meetings of the Monetary Board on monetary policy to help the public gauge the BSP’s commitment to achieve the inflation target.

Answer 25

Highlights of MB meetings on monetary policy

Question 26

To ensure accountability in cases where the BSP fails to achieve inflation target, the BSP Governor issues an Open Letter to the President outlining the reasons why actual inflation did not fall within the target, along with the steps that will be taken to bring inflation towards the target. Open Letters to the President have been issued on 16 January 2004, 18 January 2005, 25 January 2006, 19 January 2007, 14 January 2008, 26 January 2009, 28 January 2016, 27 January 2017, 25 January 2019, 18 January 2022 and 24 January 2023.
The BSP was able to achieve its inflation target from 2009 to 2014, 2017, 2019, and 2020. For this reason, no Open Letters were issued for this period.

Answer 26

Open Letter to the President

Question 27

It refer to the implementation of monetary policy. To ensure that the monetary policy decision is transmitted to the financial market and the economy in general, the BSP uses its suite of monetary instruments to influence the underlying demand and supply conditions for central bank money.

Answer 27

Monetary Operations

Question 28

It refers to negotiable monetary instruments issued by the BSP as part of its structural liquidity management operations. The issuance of securities by the BSP absorbs excess liquidity from the financial system by locking funds in longer-term monetary instruments. Securities issued by the BSP, which may be in the form of bills and/or bonds, can be traded in the secondary market.

Answer 28

BSP Securities

Question 29

involves direct purchase/sale of government securities by the BSP from/to the market for the purpose of increasing/decreasing money supply on a more permanent basis. In such a transaction, the parties do not commit to reverse the transaction in the future, creating a more permanent effect on the banking system’s level of money supply.

Answer 29

Outright purchases and sales of securities

Question 30

refer to transactions involving the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed on the deal date (the first leg), and a reverse exchange of the same two currencies at a date further in the future (the second leg) at a rate (different from the rate applied to the first leg) agreed on deal date.

Answer 30

Foreign Exchange Swaps

Question 31

The BSP, like other central banks, offers term deposits as one of the monetary tools to absorb liquidity. In November 1998, the BSP offered the Special Deposit Accounts (SDA) to banks and later expanded the access in April 2007 to trust entities of banks and non-bank financial institutions. With the adoption of the IRC system in 2016, the SDA facility was replaced by the term deposit facility (TDF).

Answer 31

Acceptance of Term Deposits

Question 32

is a liquidity absorption facility used by the BSP for active liquidity management. Counterparties are asked to submit bids (volume and rate) for term placements with the BSP. Currently, the BSP offers three tenors—seven, 14, and 28 days—in term deposit auction.

Answer 32

Term Deposit Facility (TDF)

Question 33

The BSP offers standing liquidity (lending and deposit) windows to provide or absorb liquidity at the initiative of the counterparty. These standing overnight facilities are available on demand to qualified counterparties during BSP business hours. The two standing facilities that form the upper and lower bound of the corridor are set at ± 50 basis points (bps) around the policy rate (the overnight RRP rate under the new IRC structure).

Answer 33

Standing Liquidity Facilities

Question 34

The standing overnight deposit facility will absorb any residual system liquidity to prevent market interest rates from falling below the corridor. Interest rate for the O/N deposit facility is the RRP rate minus 50 bps (0.50 percentage point). The interest rate for the O/N deposit facility serves as a floor for the O/N interbank rate.

Answer 34

Overnight Deposit Facility

Question 35

The standing overnight lending facility provides collateralized overnight funding to BSP counterparties to clear end-of-day imbalances. Interest rate for the O/N lending facility is the RRP rate plus 50 bps (0.50 percentage point). The interest rate for the O/N lending facility serves as a ceiling for the O/N interbank rate.

Answer 35

Overnight Lending Facility

Question 36

It is defined as a continuous increase in the price level usually expressed as an annual percentage rate.

Answer 36

Inflation

Question 37

the most extreme type of inflation that a country
can experience. It occurs when the price level increases at
extremely rapid rates, say 10-20% per month or when in the final
stages of this rates advances at close 1,000% per
month. It usually exists during tremendous social
upheavals as during revolutions and wars.

Answer 37

Hyperinflation

Question 38

This results form the increases in
aggregate demand relative to the available supply of goods
and services. This is traditional interpretation of inflation
often summarized as “too many dollars chasing too few
goods.” Government spending for defense and social
programs is often singled out as the chief cause of demand-
pull inflation.

Demand-pull inflation happens when there is a lot of demand for goods and services, but there aren’t enough of them available. It’s like when there are too many people who want to buy things, but there aren’t enough things to go around.

The main reason for demand-pull inflation is when the government spends a lot of money on things like defense and social programs. This creates more demand in the economy because the government is buying a lot of stuff. When there is more demand than supply, prices tend to go up because people are willing to pay more to get what they want.

Answer 38

Demand Pull Inflation

Question 39

This results from aggressive increases in
wages and prices by concentrations of labor in the form of
labor unions and concentrations of capital in the form of
large monopolistic and oligopolistic industries. These noncompetitive elements of the economy have considerable market power, so they can increase wages beyond basic productivity gains and pass on the higher cost to the
consumer because they have significant price-making ability.

Cost-push inflation happens when wages and prices increase aggressively because of the actions of powerful labor unions and big companies that dominate the market. These groups have a lot of influence and can push for higher wages and prices even beyond what is justified by productivity improvements.

For example, labor unions can negotiate for higher wages for their members, even if the productivity of the workers doesn’t increase proportionally. Similarly, large companies with a lot of market power can raise their prices because they know people will still buy their products, even if the cost of producing those products hasn’t increased significantly.

Answer 39

Cost-push Inflation

Question 40

This results from a combination of demand-pull and cost push elements. A demand-pull inflation initiated by increased government spending for defense such as that for Vietnam in the late 1960s could easily bring cost-push
elements into play. As prices start to increase, labor unions and large business firms can, respectively, raise wages and prices.

Mixed inflation occurs when both demand-pull and cost-push factors contribute to rising prices. It’s like a combination of too many people wanting to buy things and powerful groups pushing for higher wages and prices.

For example, when the government spends a lot of money on things like defense, it can create more demand in the economy and cause prices to go up. This is demand-pull inflation. But as prices start increasing, labor unions and big companies may take advantage of the situation and demand higher wages and prices for their products. This is the cost-push element.

Answer 40

Mixed Inflation