BSP TOOLS

BSP Tools BY: Group 2 The BSP and its Monetary

Policy 5 Tools of BSP Required Reserves Rediscounting Open Market Operations
Selective Credit Control The Bangko Sentral ng Pilipinas and abbreviated as BSP,
is the central bank of the Philippines. It was rechartered on July 3, 1993, pursuant
to the provision of the 1987 Philippine Constitution and the New Central Bank Act
of 1993. The BSP was established on January 3, 1949, as the countrys central
monetary authority. Monetary policy is the process by which the monetary
authority of a country controls the supply of money, often targeting a rate of
interest for the purpose of promoting economic growth and stability. *Required
Reserves
*Rediscounting
*Open Market Operations
*Selective Credit Control
*Moral Suasion The BSP decides the general lending behavior of the commercial
banks. At any time, it may change the percentage at which banks can lend out of
their deposits. With the prerogative as the banker of commercial banks, the BSP
simply requires commercial banks to keep a certain percentage of their deposits
in reserve this is to influence the banks lending behavior. To illustrate, if the BSP
decides that lending behavior should be 80%, the reserves it requires is 20%.
Rediscounting refers to BSP's prerogative to set the limit to the funds that
commercial banks can borrow and to designate the rate of interest at which it
lends when commercial banks, on the basis of bank's loan papers, borrow from
BSP. The BSP rediscounts this loan paper and the rate of interest it charges is
called rediscount rate. The rediscount rate provides a signal to the commercial
banks on the trend of interest rates in general, thus it is helpful when BSP seeks
to control interest rate. For example, instead of giving up to 85% of the face value
of the loans, it may give only up to 65%. The BSP actively participates in the
purchase and sale of government securities in active and open money market.
Open Market Operations consist of repurchase and reverse repurchase
transactions, outright transactions, and foreign exchange swaps.

*Repurchase and Reverse Repurchase

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 rate. The BSPs 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
the liquidity of money. These transactions usually have maturities ranging from
overnight to one month. *Outright Transactions
Unlike the repurchase or reverse repurchase, there is no clear intent by the
government to reverse the action of their selling/buying of monetary securities.
Thus, this transaction creates a more permanent effect on our monetary supply.
When the BSP buys securities, it pays for them by directly crediting its
counterpartys Demand Deposit Account with the BSP. The reverse is done upon
the selling of 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. The reserve
requirement (or cash reserve ratio) is a central bank regulation that sets the
minimum fraction of customer deposits and notes that each commercial bank
must hold (rather than lend out) as reserves. These required reserves are
normally in the form of cash stored physically in a bank vault (vault cash) or
deposits made with a central bank.
 The required reserve ratio is sometimes used as a tool in monetary policy,
influencing the country's borrowing and interest rates by changing the amount of
funds available for banks to make loans with. Western central banks rarely alter
the reserve requirements because it would cause immediate liquidity problems for
banks with low excess reserves; they generally prefer to use open market
operations (buying and selling government-issued bonds) to implement their
monetary policy. Moral Suasion Using this tool, the BSP decides the kind of credit
it will give to clients. It prioritizes its lending activity either to production or
consumption. Because, if production is prioritized, credit for consumption is
lessened and gives more funds to production and vice-versa.

It is an important tool in BSP which is a major weapon of the monetary policy used
to control the demand and supply of money (liquidity) in the economy. The BSP
may hold sessions with commercial banks and try to persuade or make
suggestions to the heads of commercial banks to redirect their efforts in national
development goals. It is the monetary policy tool that tests the persuasive ability
of the Monetary Board and the Governor of BSP.

Non-official' tool of monetary policy which governments employ to persuade

(instead of coerce through law making power) financial institutions in following
suggested guidelines on the availability and cost of credit. Moral suasion is used
typically by making policy announcements to induce the desired response, before
resorting to mandatory compliance through statutory regulations.

WIKIPEDIA

Monetary policy of the Philippines

From Wikipedia, the free encyclopedia

Monetary policy is the monitoring and control of money supply by a central bank,
such as the Federal Reserve Board in the United States of America, and the Bangko
Sentral ng Pilipinas in the Philippines. This is used by the government to be able to
control inflation, and stabilize currency. Monetary Policy is considered to be one of
the two ways that the government can influence the economy the other one
being Fiscal Policy (which makes use of government spending, and taxes).
[1] Monetary Policy is generally the process by which the central bank, or
government controls the supply and availability of money, the cost of money, and the
rate of interest.

Contents
[hide]

1Money Supply Indicator

1.1M1: Narrow Money

1.2M2: Broad Money
1.3M3: Broad Money Liabilities
1.4M4: Liquidity Money
1.5Implications
 2Monetary Policy Instruments

2.1Open Market Operations

2.2Acceptance of Fixed-Term Deposits
2.3Standing Facilities
2.4Reserve Requirements

3Philippine Monetary/Currency Policy

3.1Bangko Sentral ng Pilipinas

3.2Philippine Monetary Framework I: 1980s to early 1990s
3.3Philippine Monetary Framework II: June 1995 to Present
3.4Current Approach: Inflation Targeting

4Monetary Policy Issues

4.1Exchange Rate
4.2Role of Monetary Aggregates
4.3Measurement of Inflation and Liquidity Trap
4.4Budget Deficit and External Debts
4.5Fiscal Dominance

5References

Money Supply Indicator[edit]

HYPERLINK
"https://en.wikipedia.org/wiki/File:The_New_Generation_Philippine_Banknotes.jp
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The New Generation Philippine Banknotes

Money supply indicators are often found to contain necessary information for
predicting future behavior of prices and assessing economic activity. Moreover, these
are used by economists to confirm their expectations and help forecast trends in
consumer price inflation. One can predict, to a certain extent, the government's
intentions in regulating the economy and the consequences that result from it. For
example, the government may opt to increase money supply to stimulate the economy
or the government may opt to decrease money supply to control a possible mishap in
the economy.[2]
These indicators tell whether to increase or decrease the supply. Measures that include
not only money but other liquid assets are called money aggregates under the name
M1, M2, M3, etc.
M1: Narrow Money[edit]
M1 includes currency in circulation. It is the base measurement of the money supply
and includes cash in the hands of the public, both bills and coins, plus peso demand
deposits, tourists checks from non-bank issuers, and other checkable deposits.
[3] Basically, these are funds readily available for spending. Adjusted M1 is
calculated by summing all the components mentioned above.[2]
M2: Broad Money[edit]
This is termed broad money because M2 includes a broader set of financial assets held
principally by households.[2] This contains all of M1 plus peso saving deposits
(money market deposit accounts), time deposits and balances in retail money
market mutual funds.[3]
M3: Broad Money Liabilities[edit]
Broad Money Liabilities include M2 plus money substitutes such as promissory
notes and commercial papers.[3]
M4: Liquidity Money[edit]
These include M3 plus transferable deposits, treasury bills and deposits held in
foreign currency deposits. Almost all short-term, highly liquid assets will be included
in this measure.[3]
Implications[edit]
If the velocity of M1 and M2 money stock has been low, this indicates that there is a
lot of money in the hands of consumers and money is not changing hands frequently.
[4]
Generally we would expect that when money supply indicators are growing faster
than interest rates plus growth rate or inflation, whichever is higher, interest rates
should possibly be increased. This should only generally apply when broad measures
of money supply growth are higher than narrow measures, to rule out some of the
measurement error issues that could emerge.[5]

Monetary Policy Instruments[edit]

Open Market Operations[edit]
Open Market Operations consist of repurchase and reverse repurchase transactions,
outright transactions, and foreign exchange swaps.

Repurchase and Reverse Repurchase

 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 rate.[6] The BSPs
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 the liquidity of money. These transactions
usually have maturities ranging from overnight to one month.

Outright Transactions

Unlike the repurchase or reverse repurchase, there is no clear intent by the

government to reverse the action of their selling/buying of monetary
securities. Thus, this transaction creates a more permanent effect on our
monetary supply. When the BSP buys securities, it pays for them by directly
crediting its counterpartys Demand Deposit Account with the BSP.[6] The
reverse is done upon the selling of 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.[7]
Acceptance of Fixed-Term Deposits[edit]
To expand its liquidity management, the Bangko Sentral introduced this method in
1998. In the Special Deposits Account, or SDA, consists fixed terms deposits by
banks and institutions affiliated with the BSP.[6]
Standing Facilities[edit]
To increase the volume of credit in the financial system, the Bangko Sentral ng
Pilipinas extends loans, discounts, and advances to banking institutions.
Rediscounting is a standing credit facility provided by the BSP to help banks meet
temporary liquidity needs by refinancing the loans they extend to their clients. There
are two types of rediscounting in the BSP: the peso rediscounting facility and the
Exporters dollar and Yen Rediscount Facility.
Reserve Requirements[edit]
In banking institutions, there are required amounts that banks cannot lend out to
people. They always need to maintain a certain balance of money, which are called
"reserves". Once these reserve requirements are changed and are varied, changes in
the monetary supply will be observed greatly.[8]
Two Forms:

1. Regular or Statutory Reserves

2. Liquidity Reserves

Philippine Monetary/Currency Policy[edit]

Bangko Sentral ng Pilipinas[edit]
In accordance with Republic Act No. 265,[9] The Bangko Sentral ng Pilipinas or BSP
is the central monetary authority of the republic of the Philippines. It provides policy
directions in the areas of money, banking and credit and exists to supervise operations
of banks and exercises regulatory powers over non-bank financial institutions. It
keeps aggregate demand from growing rapidly with resulting high inflation, or from
growing too slowly, resulting in high unemployment.[10]
The primary objective of BSP's monetary policy is to promote price stability because
it has the sole ability to influence the amount of money circulating in the economy. In
doing so, other economic goals, such as promoting financial stability and achieving
broad-based, sustainable economic growth, are given consideration in policy decision-
making.[11]
Philippine Monetary Framework I: 1980s to early
1990s[edit]
In the past, the BSP followed the monetary aggregate targeting approach to monetary
policy. This approach is based on the assumption that there is a stable and predictable
relationship between money, output and inflation.
In particular, all money aggregates, with the exception of reserve money, are
incorporated with output and interest rate. This means that there is a long-run
relationship between money on one hand and output and interest rate on the other so
that even if there are shocks in the economy, the variables will return to their trend
equilibrium levels.[12]
This means that changes in money supply (on the assumption that velocity is stable
over time) are directly related to price changes or to inflation. Thus, it is assumed that
the BSP is able to determine the level of money supply that is needed given the
desired level of inflation that is consistent with the economy's growth objective. In
effect, under the monetary targeting framework, the BSP controls inflation indirectly
by targeting money supply.[13]
Philippine Monetary Framework II: June 1995 to
Present[edit]
The BSP employs a modified framework beginning the second semester of 1995 in
attempt to enhance the effectiveness of the monetary policy by complementing
monetary aggregate targeting with some form of inflation targeting, placing greater
emphasis on price stability.
Certain key modifications include:

Allows base money levels to go beyond target as long as the inflation rates are
met
An excess of one or more percentage points of inflation over the program
induces mopping up operation by the BSP to bring down base money to the
previous months level[13]

Under an aggregate targeting framework, the BSP fixes money growth so as to

minimize expected inflation. On the other hand, under the new framework, BSP sets
monetary policy so that price level is not just zero in expectation but is also zero
regardless of latter shocks.[13] Moreover, the framework was changed because BSP
wanted to address the fact that aggregate targeting did not account for the long-run
effects of monetary policy on the economy.
With this approach, the BSP can exceed the monetary targets as long as the actual
inflation rate is kept within program levels and policymakers monitor a larger set of
economic variables in making decisions regarding the appropriate stance of monetary
policy.[12]
Current Approach: Inflation Targeting[edit]
As mentioned earlier, Inflation Targeting requires a public announcement of an
inflation rate that a country will target for the coming years, or in a given period of
time. It focuses on maintaining a low level of inflation, that which is considered to be
optimal, or at least would allow the country to have ample economic growth. Its main
desire is to achieve price stability as the ultimate end goal of the monetary policy.
[12] The Philippines formally adopted Inflation Targeting as the framework for
Monetary Policy on January 2002.
The Philippines inflation target is measured through the Consumer Price Index (CPI).
For 2009, inflation target has been set to be 3.5 percent, having a 1% tolerance level,
and 4.5 percent for 2010, also having 1% tolerance. Also, the Monetary Board of the
Philippines announced a target of around 41 percent from 2012 to 2014.[14]

Monetary Policy Issues[edit]

Exchange Rate[edit]
Exchange rates play a significant role in monetary transmission mechanism and at the
same time, it can have a large impact on inflation rates. Although the BSP has adopted
the inflation targeting approach, it may be tempted to inexplicitly target exchange rate
to achieve its low inflation target. The issue here is the extent of the exchange rate
pass-through or ERPT to domestic prices since higher ERPT would require the BSP to
shift its attention to exchange rate movements to stabilize prices.[15]
Role of Monetary Aggregates[edit]
Since the shift to inflation targeting, BSP has already abandoned monetary aggregates
because its information content has apparently declined in the recent years. Moreover,
it is also assumed that a shift of approach was necessary because money aggregates
are normally not good indicators of future economic policy requirements due to
unreliability of measurement.[15]
Measurement of Inflation and Liquidity Trap[edit]
Since inflation targeting leads to lower and stable inflation rates, more improvement
should then be given to the measurement of the consumer price index since few
percentage points have greater repercussions when rates are low. Errors in CPI
measurement could lead to ineffective and unsuitable monetary policy response by the
BSP which definitely result to detrimental effects to the economy.[15]
Another issue arising from monetary policies is the liquidity trap. This happens when
inflation rate declines too much leading to a threat of deflation. Liquidity trap is
defined as a situation in which there are zero nominal interest rates, persistent
deflation and deflation expectations. In the event this occurs, bonds and money earn
the same real rate of return thus making people indifferent to holding bonds or excess
money.[15]
Budget Deficit and External Debts[edit]
Given high budget deficits, the government is concerned about two closely related
issues: it does not want to pay very high interest on its borrowings and it does not
want to crowd out the market. Ideally, the government could raise tax revenues to
avoid borrowing huge sums from the market. However, the government opted to
borrow from the international capital market and though rates are low, these have
shorter maturity and countrys outstanding external debt has continued to move
towards a less ideal position.[15]
Fiscal Dominance[edit]
According to the fiscal theory of the price level, it is not the non-interest bearing
money but the total nominal liabilities including interest bearing notes and future
fiscal surpluses that matter for price-level determination. In the absence of fiscal
discipline, an independent central bank such as the BSP cannot guarantee a stable
nominal anchor. In other words, for the BSP to successfully focus on price stability,
there must be a credible commitment on the part of the National Government to
reduce total fiscal deficits by a meaningful amount.[16]

BSP

Inflation Targeting: The BSP's

Approach to Monetary Policy
Download Primer on Inflation Targeting

The primary objective of the BSP's monetary policy is to promote

price stability conducive to a balanced and sustainable growth of
the economy (Republic Act 7653). The adoption of inflation
targeting framework of monetary policy in January 2002 is aimed at
achieving this objective.

Inflation targeting is focused mainly on achieving a low and stable

inflation, supportive of the economys growth objective. This approach
entails the announcement of an explicit inflation target that the BSP
promises to achieve over a given time period.

o The Inflation Target

The governments inflation target is defined in terms of the

average year-on-year change in the consumer price index (CPI)
over the calendar year. In line with the inflation targeting
approach to the conduct of monetary policy, the
Development Budget Coordination Committee (DBCC)
through its Resolution No. 2015 7 dated 29 December
2015, maintained the current inflation target at 3.0 percent
1.0 percentage point for 2016 2018.

Consistent with the inflation targeting framework, the

Monetary Board announced in July 2010the BSPs shift to a
fixed inflation target for the medium term of 4.0 percent 1
percentage point for 2012-2014. The shift to a fixed medium-
 term inflation target from a variable annual inflation target was
approved by the Development Budget Coordination Committee
(DBCC) on 9 July 2010 under DBCC Resolution No. 2010-3.

To achieve the inflation target, the BSP uses a suite of monetary policy
instruments in implementing the desired monetary policy stance. The
reverse repurchase (RRP) or borrowing rate is the primary monetary policy
instrument of the BSP.

Other monetary policy instruments include:

encouraging/discouraging deposits under the term deposit

auction facility (TDF);
standing liquidity facilities, namely, the overnight lending
facility (OLF) and the overnight deposit facility (ODF);
increasing/decreasing the reserve requirement;
adjusting the rediscount rate on loans extended to banking
institutions on a short-term basis against eligible collateral
of banks' borrowers;
outright sales/purchases of the BSP's holding of government
securities

1. Reverse repurchase facility

With the implementation of the IRC system, the RRP facility was
transformed into an overnight facility and offered using a fixed-rate
and full-allotment method, where individual bidders are awarded a
portion of the total offer depending on their bid size. Fixed-rate, full
allotment method will help ensure that the overnight rate sits close to
the BSP policy rate. The features of the O/N RRP facility can be
accessed on the monetary operations page.

2. Acceptance of term deposits

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 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
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. A more detailed discussion on the
features of the TDF can be accessed on the monetary
operations page.

3. 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.
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 target policy rate (the overnight RRP
rate under the new IRC structure).

4. Rediscounting

The BSP extends discounts, loans and advances to banking institutions

in order to influence the volume of credit in the financial system.
Therediscounting facility allows a financial institution to borrow
money from the BSP using promissory notes and other loan papers of
its borrowers as collateral. In August 2013, the BSP restructured the
rediscounting window to align it further with the BSP's market-based
monetary operations framework and with the international central
banking practice of scaling down directed credit operations. 3

Under Circular No. 806 series of 2013, two separate rediscounting

windows were established, namely: (1) the Rediscounting Window I
(RW I) for universal and commercial banks (U/KBs); and (2) the
Rediscounting Window (II) for thrift banks (TBs), cooperative banks
(coop banks), and rural banks (RBs). Banks will be able to access RWs
I and II on an open-volume basis consistent with the objective of
reorienting the BSP rediscounting window as a regular liquidity
standing facility. In the RW I, the rediscount rate was aligned with the
lending rate under the BSP RP facility plus the appropriate term
premium to encourage banks to exhaust other possible sources of
funding before trying to access the central bak rediscounting window.
Meanwhile the interesrtrate in the RW II is pegged to the overnight
RRP rate plus a term premium. TBs will have access to the RW II until
November 2018, while coop banks and RBs will have access to the
RW II until November 2023. By November 2023, the RW II will no
longer be operational and all banks shall have access only to RW I.

5. Reserve requirements

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. Changes in reserve
requirements have a significant effect on money supply in the banking
system, making them a powerful means of liquidity management by
the BSP.

Reserve requirements are imposed on the peso liabilities of

universal/commercial banks (UBs/KBs), thrift banks (TBs), rural
banks (RBs) and cooperative banks (Coop Banks), and non-bank
financial institutions with quasi-banking functions (NBQBs).
 Reservable liabilities include demand, savings, time deposit and
deposit substitutes (including long-term non-negotiable tax-exempt
certificates of time deposit or LTNCTDs)

The existing reserve requirement ratios vary across bank types and
liabilities. The current headline reserve requirement ratio of 20 percent
is imposed on certain liabilities of UBs/KBs and NBQBs. Previously,
the eligible forms of compliance to the reserve requirements included
banks' deposits in their demand deposit account (DDA) with the BSP,
reserve-eligible government securities, and vault cash. Effective on the
reserve week beginning on 6 April 2012, the BSP excluded vault cash
(for banks) and demand deposits (NBQBs) as eligible forms of reserve
requirement compliance. 4 At the same time, the BSP unified the
existing statutory reserve requirement and liquidity reserve
requirement into a single set of reserve requirement as well as
discontinued the renumeration of the unified reserve requirements.

The Inflation Target

The Development Budget and Coordination Committee (DBCC), an inter-agency
economic planning body together with the BSP sets the annual inflation targets. The
government's inflation target is defined in terms of the average year-on-year change in
the consumer price index (CPI) over the calendar year. The BSP makes the
announcement of the inflation target two years in advance. On9 July 2010, the BSP
announced a shift to a fixed inflation target for the medium term, beginning with
a target of 4.0 percent 1.0 percentage point for 2012-2014. In 2015, the inflation
target was 3.0 percent 1.0 percentage point. For 2016-2018, the inflation target
was maintained at 3.0 percent 1.0 percentage point.

Inflation targeting is an approach to monetary policy that involves the use of a

publicly announced inflation target set by the Government, which the BSP commits to
achieve over a two-year horizon. Promoting price stability is the BSP's main priority,
and the target serves as a guide for the public's expectations about future inflation,
allowing them to plan ahead with greater certainty.

The Advisory Committee

The Advisory Committee was established as an integral part of the institutional setting
for inflation targeting. It is tasked to deliberate, discuss and make recommendations
on monetary policy to the Monetary Board. Starting in 2012, the Committee will
hold eight (8) monetary policy meetings in a year. The members of the Advisory
Committee are as follows:
 Amando M. Tetangco, Jr.
Chairman Governor

Diwa C. Guinigundo
Members Deputy Governor
Monetary Stability Sector

Nestor A. Espenilla, Jr.

Deputy Governor
Supervision and Examination Sector

Francisco G. Dakila, Jr.

Managing Director
Monetary Policy Sub-Sector

Ma. Ramona GDT Santiago

Assistant Governor
Treasury Department

Monetary Policy Decisions

2016| 2015 | 2014 | 2013 | 201
2 | 2011 | 2010 | 2009 | 2008
| 2007 | 2006 | 2005 | 2004
| 2003 | 2002 | 2001 |
2016

23 June

The Monetary Board decided to maintain the interest rate on the BSPs overnight
reverse repurchase (RRP) facility at 3.0 percent. The corresponding interest rates on
the overnight lending and deposit facilities were also kept steady. The reserve
requirement ratios were likewise left unchanged.

11 February, 23 March, 12 May

The Monetary Board decided to maintain the BSP's key policy rates at 4.00 percent
for the overnight borrowing or reverse repurchase (RRP) facility and 6.00 percent for
the overnight lending or repurchase (RP) facility. The interest rates on term RRPs,
RPs and special deposit accounts (SDA) were also kept steady. The reserve
requirement ratios were likewise left unchanged.

2015

12 February, 26 March, 14 May, 25 June, 13 August, 24 September, 12

November, 17 December

The Monetary Board decided to maintain the BSP's key policy rates at 4.00 percent
for the overnight borrowing or reverse repurchase (RRP) facility and 6.00 percent for
the overnight lending or repurchase (RP) facility. The interest rates on term RRPs,
RPs and special deposit accounts (SDA) were also kept steady. The reserve
requirement ratios were likewise left unchanged.

HYPERLINK
"http://www.bsp.gov.ph/monetary/monetary.asp" \l
"top"

Open Letter to the President

To ensure accountability in cases where the BSP fails to achieve the 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,and 28 January 2016.

The BSP was able to achieve its inflation target from 2009 to 2014. For this reason, no
Open Letters were issued for this period.

Monetary Operations under an

Interest Rate Corridor (IRC)
Framework
Monetary operations refer to the
buying/selling of government
securities, lending/borrowing against
underlying assets as collateral,
acceptance of fixed-term deposits,
foreign exchange swaps, and the use
of other monetary instruments of the
Bangko Sentral aimed at influencing
the underlying demand and supply
conditions for central bank money.

On 3 June 2016, the BSP formally

adopted an interest rate corridor
(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 (CB) lends to banks
(typically an overnight lending rate)
and a rate at which it takes deposits
from them (deposit rate). 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 rate
(thereby forming the lower bound).

Related info:

Press statement on IRC

System
Primer on Monetary
Operations under the IRC
System

1. Open Market Operations (OMO)

Reverse Repurchase/Repurchase transactions

In a repurchase transaction, the BSP buys government securities (GS) from a bank with a
commitment to sell them back at a specified future date at a predetermined rate, resulting in
an expansionary effect on liquidity. Conversely, in a reverse repurchase (RRP) operation, the
BSP also acts as the seller of GS and the banks payment to the BSP has a contractionary
effect on liquidity.

The interest rate for the overnight RRP facility signals the monetary policy stance and serves
as the BSP s primary monetary policy instrument. The RRP facility is offered to qualified
counterparties daily using a fixed-rate and full-allotment method, where individual bidders are
 awarded a portion of the total offered amount depending on their bid size.

Outright purchases and sales of securities

An outright contract 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 systems level of money
supply.
Foreign exchange swaps
Foreign exchange swaps 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.

2. Acceptance of term deposits

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).

Term Deposit Facility (TDF)

The TDF is a liquidity absorption facility used by the BSP for liquidity management.
Counterparties are asked to submit bids (volume and rate) for term placements with the BSP.
The BSP will initially offer two tenorsseven days and 28 daysin its term deposit auction.
The possibility of offering longer tenors will be evaluated going forward, depending on the
liquidity needs and preferences of the market.

Auction Schedule: Q2 and Q3 2016

Latest Auction Result: Release date: 3 August 2016

Historical Auction Results: Download

3. Standing Liquidity Facilities

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).

Overnight Deposit Facility

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.

Overnight Lending Facility

 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.

Monetary Policy - Glossary and

Abbreviations
Base Money (BM) the sum of the reserve money (RM), reserve-eligible
government securities, liquidity reserves and reserve deficiency of banks. 1

Consumer Price Index (CPI) represents the average price for a given period of a
standard basket of goods and services consumed by a typical Filipino family. This
standard basket contains hundreds of consumption items (such as food products,
clothing, water and electricity) whose price movements are monitored to determine
the overall change in the CPI, or the level of inflation (See also Inflation Rate).

Demand-Pull Factors of Inflation pressures on inflation caused by relatively

higher demand compared to the available supply of goods and services. Usually, when
people, business or the government receive more income, realize capital gains or
obtain easier access to credits, the overall demand for goods and services may
increase. This would lead to increased prices, assuming the supply of goods and
services is not able to adjust quickly enough to meet the higher demand. In addition,
supply shocks in the economy that, either increase the costs of raw materials or curtail
supply or both could result in second-round effects that, in turn, may lead to higher
demand-side price pressures. Higher oil and agricultural commodity prices, for
instance, may eventually affect the price- and wage-setting behavior of economic
agents, which could then lead to second-round price pressures from the demand side.

Explanation Clauses - the predefined set of acceptable circumstances under which an

inflation targeting central bank may fail to achieve its inflation target. Such
circumstances recognize the fact that there are limits to the effectiveness of monetary
policy and that deviations from the inflation target may sometimes occur because of
factors beyond the control of the central bank. Under the inflation targeting
framework of the BSP, these circumstances include price pressures arising from: (a)
volatility in the prices of agricultural products; (b) natural calamities or events that
affect a major part of the economy; (c) volatility in the prices of oil products; (d)
significant government policy changes that directly affect prices such as changes in
the tax structure, incentives and subsidies.

HYPERLINK "http://www.bsp.gov.ph/monetary/glossary.asp" \l "top"

Inflation Rate - the rate of change in the weighted average prices of goods and
services typically purchased by consumers. The weights of the goods and services are
based on their corresponding share to the Consumer Price Index (CPI) basket, i.e., the
standard basket of goods and services purchased by a typical household. In the
Philippines, the composition of the CPI basket is determined from the Family Income
and Expenditure Survey (FIES) periodically conducted by the National Statistics
Office (NSO). Inflation is typically defined as the annual percentage change in the
CPI. It indicates how fast or slow the CPI increases or decreases.

Headline Inflation the rate of change in the weighted average prices of all
goods and services in the CPI basket.

Core Inflation An alternative measure of inflation that eliminates transitory

effects on the CPI, core inflation removes certain components of the CPI
basket that are subject to volatile price movements, such as food and energy,
and other items affected by supply side factors, the price changes from which
are not within the control of monetary policy.

Official Definition - This refers to the rate of change in the CPI which
excludes the following items/ commodity groups: rice, corn, fruits
and vegetables, and fuel items (gas, liquefied petroleum gas (LPG),
kerosene, gasoline and diesel), which together represent 18.4
percent of the CPI basket. Core inflation data for 2001-2002 are BSP
estimates while the data starting January 2003 are the official
National Statistics Office (NSO) figures.

BSPs Alternative Measures of Core Inflation:

o Net of Selected Volatile Items - This measure refers to the rate of

change in the CPI which excludes the following items/ commodity
groups: educational services, fruits and vegetables, personal
services, rentals, recreational services, rice, and corn which
together represent 37.6 percent of the CPI basket.

o Trimmed Mean - represents the average inflation of the (weighted)

middle 70 percent in a lowest-to-highest ranking of year-on-year
inflation rates for all CPI components.

o Weighted Median - represents the middle inflation (corresponding to

a cumulative CPI weight of 50 percent) in a lowest-to-highest
ranking of year-on-year inflation rates.

HYPERLINK "http://www.bsp.gov.ph/monetary/glossary.asp" \l "top"

Inflation Expectations the perceived rate of change, trends and movements of the
prices of goods and services in the economy. Measures of inflation expectations
include survey-based consumer and business expectations of inflation and inflation
forecasts of private analysts, among others.

Inflation Target level of inflation which the BSP aims to achieve over a given
period under the inflation targeting framework. The governments inflation target is an
annual target, currently expressed in terms of a point target (with a tolerance interval
of 1 percentage point) and is set jointly by the BSP and the government through an
inter-agency body, the Development Budget Coordination Committee (DBCC),
although the responsibility of, and accountability in, achieving the target rests
primarily on the BSP.

Inflation Targeting (IT) a framework for monetary policy that focuses mainly on
achieving price stability as the ultimate objective of monetary policy. The IT approach
entails the announcement of an explicit inflation target that the monetary authority
promises to achieve over a policy horizon of two years.

HYPERLINK "http://www.bsp.gov.ph/monetary/glossary.asp" \l "top"

Interest Rates the cost of borrowing money or the amount paid for lending money
expressed as a percentage of the principal.

Interest Rate Differential - the difference or margin between interest rates such as
the difference between domestic and foreign interest rates.

M1 or Narrow Money consists of currency in circulation (or currency outside

depository corporations) and peso demand deposits.

M2 or Broad Money consists of M1 plus peso savings and time deposits.

M3 or Broad Money Liabilities consists of M2 plus peso deposit substitutes, such

as promissory notes and commercial papers (i.e., securities other than shares included
in broad money).

HYPERLINK "http://www.bsp.gov.ph/monetary/glossary.asp" \l "top"

M4 - consists of M3 plus transferable and other deposits in foreign currency.

Monetary Aggregate Targeting an approach to monetary policy whereby the

central bank adjusts its monetary policy instruments to control the level of monetary
aggregates. This approach is based on the assumption that there is a stable and
predictable relationship between money on the one hand, and output and inflation on
the other hand. This means that the reaction of inflation to changes in money supply is
stable over time and is, therefore, predictable. The approach assumes that the
monetary authority is able to determine the level of money supply that is needed given
the desired level of inflation that is consistent with the economy's growth objective. In
effect, the monetary authority influences inflation indirectly by targeting the money
supply.

Monetary Policy measures or actions taken by the central bank to influence the
general price level and the level of liquidity in the economy. Monetary policy actions
of the BSP are aimed at influencing the timing, cost and availability of money and
credit, as well as other financial factors, for the main objective of stabilizing the price
level.

o Expansionary Monetary Policy monetary policy setting that

intends to increase the level of liquidity/money supply in the
economy and which could also result in a relatively higher inflation
path for the economy. Examples are the lowering of policy interest
rates and the reduction in reserve requirements. Expansionary
monetary policy tends to encourage economic activity as more
funds are made available for lending by banks. This, in turn,
increases aggregate demand which could eventually fuel inflation
pressures in the domestic economy.

o Contractionary Monetary Policy - monetary policy setting that

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. Examples of this are increases in policy
interest rates and reserve requirements. Contractionary monetary
policy tends to limit economic activity as less funds are made
available for lending by banks. This, in turn, lowers aggregate
demand which could eventually temper inflation pressures in the
domestic economy.

HYPERLINK "http://www.bsp.gov.ph/monetary/glossary.asp" \l
"top"

Liquidity reserves - refers to the option given to banks in complying with the reserve
requirement, whereby bonds deposited in the reserve deposit account (RDA) facility
are considered as compliance with the reserve requirement. 2

Monetary Policy Instruments the various instruments used by the BSP to achieve
the desired level of money supply. These include (a) raising/reducing the BSP's policy
interest rates; (b) increasing/decreasing the reserve requirement; (c)
encouraging/discouraging deposits in the special deposit account (SDA) facility by
banks and trust entities of BSP-supervised financial institutions; (d)
increasing/decreasing its rediscount rate on loans extended to banking institutions on
a short-term basis against eligible collaterals of banks borrowers; and (e) outright
sales/purchases of the BSPs holdings of government securities. The BSPs primary
monetary policy instruments are the overnight reverse repurchase (borrowing) rate
and the overnight repurchase (lending) rate.

Moral Suasion the influence which the central bank exercises to induce or convince
banks to conduct operations in a manner that would contribute to the attainment of
monetary goals but not necessarily support the profit-maximizing objectives of the
banks.

Open Market Operations (OMO) the sale or purchase of government securities by

the BSP to withdraw liquidity from or inject liquidity into the system.

HYPERLINK "http://www.bsp.gov.ph/monetary/glossary.asp" \l "top"

Quasi-money the sum of savings and time deposits

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

Repurchase (RP) Rate - the policy interest rate at which the BSP lends to banks with
government securities as collateral

Reserve Deposit Account (RDA) The reserve deposit account (RDA) is a deposit
facility with the BSP designed to facilitate the adoption of the change in the banks
mode of compliance with the liquidity reserve requirement, pursuant to Circular No.
539 which became effective on 25 August 2006. The liquidity reserve requirement
consisted of market-yielding government securities purchased directly from the BSP.
The RDA, which eventually replaced government securities as a form of compliance
with the liquidity reserves, allows banks to keep a portion of their reserves in the form
of a three-month term deposit in the RDA maintained with the BSP. The Treasury
Department also has the option of offering RDA with 6-and 12-month tenors, with
interest rate at one-half percent (1/2%) below the prevailing market rate for
comparable government securities. Pre-termination of RDAs is allowed, subject to a
reduction in applicable interest rates, as prescribed by the Treasury Department.

Reserve Money (RM) the sum of currency in circulation and reserves of banks
which include cash in banks vault and reserve balances or deposits with the BSP
including banks balances under the reserve deposit account (RDA).

Reserve Requirement refers to the proportion of banks deposits and deposit

substitute liabilities that banks are required to hold as reserves

Regular (statutory) reserves - pertain to the proportion of deposits and deposit

substitute liabilities, which must be held as deposits with the BSP in part, with the
remaining balance allowed to be kept in banks' vaults as cash or as reserve-eligible
government securities

Regular Reserves the proportion of deposits and deposit substitute liabilities, a

certain fixed portion of which must be held as deposits with the BSP, with the balance
kept in banks vaults as cash or eligible reserves.

HYPERLINK "http://www.bsp.gov.ph/monetary/glossary.asp" \l "top"

Reverse Repurchase (RRP) Rate the policy interest rate at which the BSP borrows
from banks with government securities as collateral.

Special Deposit Accounts Fixed-term deposits by banks and trust entities of BSP-
supervised financial institutions with the BSP. These deposits were introduced in
November 1998 to expand the BSP's toolkit for liquidity management. In April 2007,
the BSP expanded the access to the SDA facility to allow trust entities of financial
institutions under BSP supervision to deposit in the facility.

Supply Shocks to Inflation pressures on inflation resulting from shortages in

supply and increases in the cost of production without a corresponding expansion in
output. Examples of these are bad weather, natural calamities and disasters; wage
increases not matched by higher productivity of labor; hikes in international oil prices;
increases in prices of imported raw materials; and hikes in rental rates. These tend to
limit or decrease supply, and, assuming no decline in demand for goods and services,
push prices up. (Conversely, an oversupply of commodities tends to induce the
opposite effect on prices.)

Transmission Mechanism of Monetary Policy process by which monetary policy

actions affect economic and financial variables. This mechanism describes the various
channels, as well as the length of time, through which monetary policy actions affect
the real economy, particularly inflation and output.

Treasury Bill Rate the yield on short-term debt instruments issued by the National
Government (NG) (the primary market) for the purpose of generating funds. Treasury
bills come in maturities of 91, 182 and 364 day HYPERLINK
"http://www.bsp.gov.ph/monetary/glossary.asp" \l "top"

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1
Liquidity reserves now take the form of deposits with RDA, which in turn is already
counted as part of Reserve Money.
2
Originally, these consisted of market-yielding GS purchased directly from the BSP
under Circular No. 10 dated 29 December 1993.