Updated Module Finman 4 PDF

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Monetary Policy and Central Banking
Course Description This course is divided in two parts in which it introduces the students to the
fundamental concepts of Monetary policy and Central banking. It covers the
development, functions, importance and operations of central banking within and
outside the Philippine borders. It is also designed to develop an understanding on how
the implementation of different monetary policies affects the economy and financial
system. An overview on the importance of money, money creation, payments and
money standards, Philippine peso, demand and supply are being discussed. Important
parts of Banking related laws (RA 7653, RA 8791 etc.) are also discussed.
Course Outline 1. Overview of Money and its functions
2. Evolution of Money
3. Money Standards
4. Monetary System during colonial regimes
5. The Bangko Sentral ng Pilipinas
6. Functions and Operations of BSP
7. The Monetary Board
8. Philippine Financial System
9. Regulations and Supervision of Financial Institutions
10. Philippine Monetary Policy
11. Core Inflation
12. Inflation Targeting
13. Interest Rates
14. Exchange Rate
15. The Role of IMF in Central Banking
16. Social Responsibility of Financial Management/Consumer Protection
Advisories
Chapter 1 -16
Rationale
Instruction to the Users This module should be completed within 5 months. If you set an average of 3 hours
per week, you should be able to complete the module comfortably by the end of the
semester. Try to do all the learning activities in this module . As much as possible
you must not review the notes while answering the exercises so that you will be able
to assess the knowledge you learned from reading this module.
Objectives • The student should develop analytical skills by applying different concepts,
theories, principles of the Philippine monetary system
• The students should understand the implications of the implementation of
different monetary policies.
• They should demonstrate knowledge, analysis of issues and understanding of
the different model shifts in the Philippine Banking System and banking
industry outside the Philippine borders.
• The students should be familiarized with the functions and operations of BSP
• The should understand the difference between interest rates used by the
central monetary authority.
• They should engage in intensive individual study and work well with others
in formal and informal cooperative learning teams through virtual activities.
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OVERVIEW OF MONEY AND ITS FUNCTIONS

What is Money?
It is anything that is generally accepted as payment for good and services or as means of repayment
of debt. Money has many uses. It is a medium of exchange and a standard of value. Such uses can be good
or can be bad. Some say that money is the root of all evil. On the other hand, others claim that money is
the source of happiness. Actually, there is nothing wrong with money itself. What is wrong is the way
money is being used. So the blame is on the users who became the slaves of money.
MONEY: ITS FUNCTIONS
Money is the thing that enables us to put food on the table and to give shelter to our family. Money
can be defined as anything that is generally accepted as payment for goods and services from other people
or even paying off debts.
Functions of Money
1. Medium of Exchange
2. Store of Value
3. Unit of Account
4. Standard of Deferred Payment
Money Functions as a Medium of exchange since it is being accepted in trade of goods and services.
Medium of exchange is something that buyers will give to a seller in return of what goods or services they
want to purchase from the seller. While many things could be used as a medium of exchange in an
economy, money is the most known and useful medium of exchange today. It enables trade because people
in the economy generally recognize money as valuable. If people stop recognizing money as valuable,
then it will cease to be a good medium of exchange because people will not be willing to exchange goods
or services for it.
In the barter economy a great difficulty was experienced in the trade of goods as the exchange in the
barter system required double coincidence of wants. Now an individual can sell his products to another
for money and then he can use that money to buy the goods he wants from others who have these goods.
As long as money is generally acceptable, there will be no difficulty in the process of exchange.
Store of value is the function of money that can be saved, retrieved and exchanged at a future time,
and be predictably useful when retrieved. More generally, a store of value is anything that retains
purchasing power into the future, it retains its value without depreciating. Gold and other metals are good
examples of assets which has stores of value as their shelf lives are essentially perpetual, Money being
the most liquid all asset, it is a convenient form in which to store wealth, Therefore, it is important that
the good chosen as money should be be easily stored without deterioration or wastage.
Money also serves as a unit of account. A unit of account is something that can be used to value goods
and services, record debts, and make calculations. In other words, it's a measurement for value. Under
barter economy there was no common measure of value in which the values of different goods could
be measured and compared with each other which makes trade difficult. A unit of account has three
important characteristics relevant to money.
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A. Divisible
A unit of account can be divided so that its component parts will equal the original value. If you divide
a hundred peso into two, the total value should still equal to a hundred. Likewise, if you cut a bar of gold
in half, the two pieces together will equal the same value as the original bar as a whole.
B. Fungible
One unit is viewed as the same as any other with no change in value. A Peso is the same as any other
Peso, and 12 ounces of 24-carat gold is no different than another 12 ounces of 24-carat gold.
C. Countable
A unit of account is also countable and subject to mathematical operations. You can easily add,
subtract, divide, and multiply units. This allows people to account for profits, losses, income, expenses,
debt, and wealth.
Another function of money is that it serves as a standard for deferred payments. Deferred payments
mean those payments which are to be made in the future. If a loan is taken today, it would be paid back
after a period of time. The amount of loan is measured in terms of money and it is paid back in money. It
indicates a widely accepted way to value a debt such that a person can acquire goods at present and pay
for them in the future. Standard of deferred payment is considered to be a direct result of two other
functions of money namely “store of value” and “unit of account”. However, for money to function as a
deferred payment standard, it must retain value, it must also store value.
Money Supply
The basic function of money is that it must be acceptable as a medium of exchange.
M0 is the total amount of cash in the economy (notes and coins incirculation and notes and coins held by
the central bank.
The M1 definition of money supply includes;
M1 = currency circulation + demand deposits
The second definition of money stock, M2 is a broader definition. It includes the concept of store of value
which includes savings and time deposits sometimes called near money or quasi money.
M2 = M1 + time deposits + savings deposits
The third measure of money is called total liquidator M3. This includes M2 plus deposit substitutes. These
consist of debt intruments or securities issued by banks but are not deposits.
M3 = M2 + deposit substitutes
The last measure of money includes M3 plus the peso equivalent of dollar deposits of residents called
Foreign Currency Deposit Units (FCDU) or Offshore Banking Units (OBU)
M4 = M3 + peso equivalent of foreign deposits in FCDU or OBU
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Demand for Money

• Transanction Demand
• Precautionary Demand
• Speculative Demand
What is Velocity of Money?

The velocity of money is a measurement of the rate at which money is exchanged in an economy.
It is the number of times that money moves from one entity to another. It also refers to how much a unit
of currency is used in a given period of time. Simply put, it's the rate at which consumers and businesses
in an economy collectively spend money. The velocity of money is usually measured as a ratio of gross
domestic product (GDP) to a country's M1 or M2 money supply.
Factors affecting velocity
Method and habit of payment
Degree of regularity of income receipt
Distribution of National Income
Buisness Conditions
Development of Banking Sector
Speed in transportation of money
Time unit of Income receipts (daily/Weekly/monthly)
Fractional Reserve Banking System

Fractional reserve banking is a system in which only a fraction of bank deposits are backed by actual cash
on hand and available for withdrawal. This is done to theoretically expand the economy by freeing capital
for lending.
Commercial banks in particular can create deposit liabilities greater than their reserves of money in the
vault which is the essence of fractional reserve system. Depositors and borrowers can circulate their
demand deposits in the banks using checks which are good as money. However only a fraction of the total
amount of checks circulated is encashed from banks, thus a commercial bank can lend more than its actual
deposits by creating more deposit liabilities while maintaining a smaller reserve to meet fractional cash
demand.
To illustrate, let us assume that a commercial bank accepts a demand deposits of P100,000 and
that at any one time, the fractional cash demand of stockholders is 20%. The deposit becomes an initial
addition to the bank assets in the form of cash (reserves) and to its liabilities in the form of demand deposit
liabilities. In turn, the bank can lend P20,000 or 20% of the initial deposit of P100,000 circulating as
money checks if necessary to meet current cash demand. This new amount further increases the asset
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account in the form of loans receivable and the liability account in the form of demand deposit liabilities.
Furthermore, the bank can stilll lend an additional of P64,000 since only P16,000 or 20% of the initial
loanable amount of P80,000 is necessary to meet current cash demand. Likewise the loan receivable
account and deposit liability account each increases further by this account.
History of Money
Pre-Hispanic Era
Long before the Spaniards came to the

Philippines in 1521, the Filipinos had established
trade relations with neighboring lands like China,
Java, Borneo, Thailand and other
settlements. Barter was a system of trading
commonly practiced throughout the world and
adopted by the Philippines. The inconvenience of
the barter system led to the adoption of a specific
medium of exchange – the cowry shells. Cowries
produced in gold, jade, quartz and wood became
the most common and acceptable form of money
through many centuries.
The Philippines is naturally rich in gold. It

was used in ancient times for barter rings, personal
adornment, jewelry, and the first local form of
coinage called Piloncitos. These had a flat base that bore an embossed inscription of the letters “MA” or
“M” similar to the Javanese script of the 11th century. It is believed that this inscription was the name by
which the Philippines was known to Chinese traders during the pre-Spanish time.
Barter rings made from pure gold, were hand fashioned by early Filipinos during the 11th and the
14th centuries. These were used in trading with the Chinese and other neighboring countries together with
the metal gongs and other ornaments made of gold, silver and copper.
Spanish Era
1521-1897
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The cobs or macuquinas of colonial mints were the earliest coins brought in by the galleons from
Mexico and other Spanish colonies. These silver coins usually bore a cross on one side and the Spanish
royal coat-of-arms on the other.
The Spanish dos mundos were circulated

extensively not only in the Philippines but the world
over from 1732-1772. Treasured for its beauty of
design, the coin features twin crowned globes
representing Spanish rule over the Old and the New
World, hence the name “two worlds.” It is also
known as the Mexican Pillar Dollar or the
Columnarias due to the two columns flanking the
globes.
Due to the shortage of fractional coins, the

barrillas, were struck in the Philippines by order of
the Spanish government. These were the first crude
copper or bronze coins locally produced in the
Philippines. The Filipino term “barya,” referring to small change, had its origin in barrilla.
In the early part of the 19th century, most of the Spanish colonies in Central and South America
revolted and declared independence from Spain. They issued silver coins bearing revolutionary slogans
and symbols which reached the Philippines. The Spanish government officials in the islands were fearful
that the seditious markings would incite Filipinos to rebellion. Thus they removed the inscriptions by
counter stamping the coins with the word F7 or YII. Silver coins with the profile of young Alfonso XIII
were the last coins minted in Spain. The pesos fuertes, issued by the country’s first bank, the El Banco
Español Filipino de Isabel II, were the first paper money circulated in the Philippines.
Revolutionary Period
1898-1899
General Emilio Aguinaldo, the first Philippine

president, was vested with the authority to produce
currencies under the Malolos Constitution of 1898. At
the Malolos arsenal, two types of two-centavo copper
coins were struck. Revolutionary banknotes were
printed in denominations of 1,5 and 10 Pesos. These
were handsigned by Pedro Paterno, Mariano Limjap
and Telesforo Chuidian. With the surrender of
General Aguinaldo to the Americans, the currencies
were withdrawn from circulation and declared illegal
currency.
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American Period
1900-1941
With the coming of the Americans

1898, modern banking, currency and credit
systems were instituted making the
Philippines one of the most prosperous
countries in East Asia. The monetary system
for the Philippines was based on gold and
pegged the Philippine peso to the American
dollar at the ratio of 2:1. The US Congress
approved the Coinage Act for the Philippines
in 1903.
The coins issued under the system

bore the designs of Filipino engraver and
artist, Melecio Figueroa. Coins in
denomination of one-half centavo to one peso
were minted. The renaming of El Banco
Espanol Filipino to Bank of the Philippine
Islands in 1912 paved the way for the use of English from Spanish in all notes and coins issued up to 1933.
Beginning May 1918, treasury certificates replaced the silver certificates series, and a one-peso note was
added.
The Japanese Occupation

1942-1945
The outbreak of World War II

caused serious disturbances in the
Philippine monetary system. Two kinds
of notes circulated in the country during
this period. The Japanese Occupation
Forces issued war notes in big
denominations. Provinces and
municipalities, on the other hand, issued
their own guerrilla notes or resistance
currencies, most of which were
sanctioned by the Philippine government
in-exile, and partially redeemed after the
war.
The Philippine Republic

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A nation in command of its destiny is the message reflected in the evolution of Philippine money
under the Philippine Republic. Having gained independence from the United States following the end of
World War II, the country used as currency old treasury certificates overprinted with the word "Victory".
With the establishment of the Central Bank of the

Philippines in 1949, the first currencies issued were
the English series notes printed by the Thomas de
la Rue & Co., Ltd. in England and the coins minted
at the US Bureau of Mint. The Filipinization of the
Republic coins and paper money began in the late
60's and is carried through to the present. In the
70's, the Ang Bagong Lipunan (ABL) series notes
were circulated, which were printed at the Security
Printing Plant starting 1978.
A new wave of change swept through the

Philippine coinage system with the flora and fauna
coins initially issued in 1983. These series featured
national heroes and species of flora and fauna. The
new design series of banknotes issued in 1985
replaced the ABL series. Ten years later, a new set
of coins and notes were issued carrying the logo of the Bangko Sentral ng Pilipinas.
As the repository and custodian of country's numismatic heritage, the Museo ng Bangko Sentral
ng Pilipinas collects, studies and preserves coins, paper notes, medals, artifacts and monetary items found
in the Philippines during the different historical periods. It features a visual narration of the development
of the Philippine economy parallel to the evolution of its currency.
MONETARY STANDARDS
The monetary standard of a country is synonymous with its standard money. The latter plus all the
paper and credit substitutes tied to and convertible into standard money constitute the monetary system.
Monetary standards are the set of rules and institutions that control the supply of money in a country’s
economy. The idea is to have rules and regulations in place to constrain the production and supply of money.
Otherwise, with excess money in the market, the whole balance of the economy will be destroyed
It is the principle way of regulating the quantity of money in the market as well as its exchange value.
So monetary standards also have an indirect effect on the prices in the economy. And by monitoring the
supply of money, it also has an effect on the rate of growth in the economy and other factors that affect such
economic growth.
Gresham Law
Under the bimetallic standard, gold and silver have the same nominal value or face value. That is,
their values are indicated like P20, P50 or P100. However the real value or value of the gold or silver as a
metal or commodity changes depending on their supply.
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Gresham's law is a monetary principle stating that "bad money drives out good." It is primarily
used for consideration and application in currency markets. Gresham’s law was originally based on the
composition of minted coins and the value of the precious metals used in them. However, since the
abandonment of metallic currency standards, the theory has been applied to the relative stability of
different currencies' value in global markets.
Gold Coin Standard
This means that there is a domestic or international confidence in the monetary standard. Thus,
there are no problem in international trade. However, gold and silver have their shortcomings. These are
bulky and heavy. In other words, they lack portability. Moreover, it is risky to be carrying gold or silver
from one place to another.
Gold Bullion Standard
The gold bullion standard is another variation of the gold standard. The monetary unit is again
defined in terms of a fixed quantity of gold, however, instead of the gold being circulated as coins, paper
money convertible into gold is used as the hand to hand currency. It replaced the gold/silver standard. The
representative money was used such as paper or coin money. The money supply was equivalent to the
amount of gold or silver reserves held by the government. People could exchange their representative
money with gold/silver if they wished to.
The supply of currency under a gold bullion standard may or may not be equal to the supply of
gold. The paper money issued as claims against the gold may be fully or partially backed by gold.
Gold/ Exchange Standard
A gold exchange standard is a mixed system consisting of a cross between a reserve currency
standard and a gold standard. In general, it includes the following rules.
First, a reserve currency is chosen. All non-reserve countries agree to fix their exchange rates to the reserve
at some announced rate. To maintain the fixity, these non-reserve countries will hold a stockpile of reserve
currency assets.
Second, the reserve currency country agrees to fix its currency value to a weight in gold. Finally,
the reserve country agrees to exchange gold for its own currency with other central banks within the
system, upon demand.
One key difference in this system from a gold standard is that the reserve country does not agree
to exchange gold for currency with the general public, only with other central banks.
The system works exactly like a reserve currency system from the perspective of the non-reserve countries.
However, if over time the non-reserve countries accumulate the reserve currency, they can demand
exchange for gold from the reserve country central bank. In this case gold reserves will flow away from
the reserve currency country.
Inconvertible paper/ Paper currency Standard

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Manage currency standard has been required by the government as the standard money for all
normal transactions. This makes it legal tender. There are no gold reserves to ensure its general
acceptability. The government orders such monetary standard as a medium of exchange and as means of
debt payments.
This inconvertible paper currency is called fiat money because it exist only on the basis of the
government decree that it is money.
The basic need for a paper money system arises out of the problems of the gold standard.
Limitations on the supply of gold and failure of the supply of gold to increase in proportion to the growth
of the demand for money make paper money supply necessary.
MONETARY SYSTEM DURING COLONIAL REGIMES
A group of Filipinos had conceptualized a central bank for the Philippines as early as 1933. It came
up with the rudiments of a bill for the establishment of a central bank for the country after a careful study
of the economic provisions of the Hare-Hawes Cutting bill, the Philippine independence bill approved by
the US Congress.
During the Commonwealth period (1935-1941), the discussion about a Philippine central bank that
would promote price stability and economic growth continued. The country’s monetary system then was
administered by the Department of Finance and the National Treasury. The Philippines was on the
exchange standard using the US dollar—which was backed by 100 percent gold reserve—as the standard
currency.
In 1939, as required by the Tydings-McDuffie Act, the Philippine legislature passed a law
establishing a central bank. As it was a monetary law, it required the approval of the United States
president. However, President Franklin D. Roosevelt disapproved it due to strong opposition from vested
interests. A second law was passed in 1944 during the Japanese occupation, but the arrival of the American
liberalization forces aborted its implementation.
Shortly after President Manuel Roxas assumed office in 1946, he instructed then Finance Secretary
Miguel Cuaderno, Sr. to draw up a charter for a central bank. The establishment of a monetary authority
became imperative a year later as a result of the findings of the Joint Philippine-American Finance
Commission chaired by Mr. Cuaderno. The Commission, which studied Philippine financial, monetary
and fiscal problems in 1947, recommended a shift from the dollar exchange standard to a managed
currency system. A central bank was necessary to implement the proposed shift to the new system.
Immediately, the Central Bank Council, which was created by President Manuel Roxas to prepare
the charter of a proposed monetary authority, produced a draft. It was submitted to Congress in
February1948. By June of the same year, the newly-proclaimed President Elpidio Quirino, who succeeded
President Roxas, affixed his signature on Republic Act No. 265, the Central Bank Act of 1948. The
establishment of the Central Bank of the Philippines was a definite step toward national sovereignty. Over
the years, changes were introduced to make the charter more responsive to the needs of the economy. On
29 November 1972, Presidential Decree No. 72 adopted the recommendations of the Joint IMF-CB
Banking Survey Commission which made a study of the Philippine banking system. The Commission
proposed a program designed to ensure the system’s soundness and healthy growth. Its most important
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recommendations were related to the objectives of the Central Bank, its policy-making structures, scope
of its authority and procedures for dealing with problem financial institutions.
Subsequent changes sought to enhance the capability of the Central Bank, in the light of a
developing economy, to enforce banking laws and regulations and to respond to emerging central banking
issues. Thus, in the 1973 Constitution, the National Assembly was mandated to establish an independent
central monetary authority. Later, PD 1801 designated the Central Bank of the Philippines as the central
monetary authority (CMA). Years later, the 1987 Constitution adopted the provisions on the CMA from
the 1973 Constitution that were aimed essentially at establishing an independent monetary authority
through increased capitalization and greater private sector representation in the Monetary Board.
The administration that followed the transition government of President Corazon C. Aquino saw
the turning of another chapter in Philippine central banking. In accordance with a provision in the 1987
Constitution, President Fidel V. Ramos signed into law Republic Act No. 7653, the New Central Bank
Act, on 14 June 1993. The law provides for the establishment of an independent monetary authority to be
known as the Bangko Sentral ng Pilipinas, with the maintenance of price stability explicitly stated as its
primary objective. This objective was only implied in the old Central Bank charter. The law also gives the
Bangko Sentral fiscal and administrative autonomy which the old Central Bank did not have. On 3 July
1993, the New Central Bank Act took effect.
THE BANGKO SENTRAL NG PILIPINAS
Chronology of Events: Central Banking in the Philippines
1900 Act No. 52 was passed by the First Philippine Commission placing all banks
under the Bureau of Treasury. The Insular Treasurer was authorized to
supervise and examine banks and banking activities.
February 1929 The Bureau of Banking under the Department of Finance took over the task of
banking supervision.
1939 A bill establishing a central bank was drafted by Secretary of Finance Manuel
Roxas and approved by the Philippine Legislature. However, the bill was
returned by the US government, without action, to the Commonwealth
Government.
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1946 A joint Philippine-American Finance Commission was created to study the

Philippine currency and banking system. The Commission recommended the
reform of the monetary system, the formation of a central bank and the
regulation of money and credit.
The charter of the Central Bank of Guatemala was chosen as the model of the
proposed central bank charter.
August 1947 A Central Bank Council was formed to review the Commission’s report and
prepare the necessary legislation for implementation.
February 1948 President Manuel Roxas submitted to Congress a bill “Establishing the Central
Bank of the Philippines, defining its powers in the administration of the
monetary and banking system, amending pertinent provisions of the
Administrative Code with respect to the currency and the Bureau of Banking,
and for other purposes.
15 June 1948 The bill was signed into law as Republic Act No. 265 (The Central Bank Act)
by President Elpidio Quirino.
3 January 1949 The Central Bank of the Philippines (CBP) was inaugurated and formally
opened with Hon. Miguel Cuaderno, Sr. as the first governor.
The broad policy objectives contained in RA No. 265 guided the CBP in the
implementation of its duties and responsibilities, particularly in relation to the
promotion of economic development in addition to the maintenance of internal
and external monetary stability.
November 1972 RA No. 265 was amended by Presidential Decree No. 72 to make the CBP
more responsive to changing economic conditions.
PD No. 72 emphasized the maintenance of domestic and international

monetary stability as the primary objective of the CBP. Moreover, the CBP’s
authority was expanded to include not only the supervision of the banking
system but also the regulation of the entire financial system.
January 1981 Further amendments were made with the issuance of PD No. 1771 to improve
and strengthen the financial system, among which was the increase in the
capitalization of the CBP from P10 million to P10 billion.
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1986 Executive Order No. 16 amended the Monetary Board membership to promote
greater harmony and coordination of government monetary and fiscal policies.
3 July 1993 Republic Act No. 7653 was passed establishing the Bangko Sentral ng
Pilipinas (BSP), replacing CBP as the country's central monetary authority.
14 February 2019 Republic Act No. 11211 was passed amending RA No. 7653. The charter
amendments bolster the capability of the BSP to safeguard price stability and
financial system stability.
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OVERVIEW OF FUNCTIONS AND OPERATIONS
Objectives
The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable
economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility
of the national currency.
Responsibilities
The BSP provides policy directions in the areas of money, banking and credit. It supervises operations
of banks and exercises regulatory powers over non-bank financial institutions with quasi-banking
functions.
Under the New Central Bank Act, the BSP performs the following functions, all of which relate to its
status as the Republic’s central monetary authority.
• Liquidity Management. The BSP formulates and implements monetary policy aimed at
influencing money supply consistent with its primary objective to maintain price stability.
• Currency issue. The BSP has the exclusive power to issue the national currency. All notes and
coins issued by the BSP are fully guaranteed by the Government and are considered legal tender
for all private and public debts.
• Lender of last resort. The BSP extends discounts, loans and advances to banking institutions
for liquidity purposes.
• Financial Supervision. The BSP supervises banks and exercises regulatory powers over non-
bank institutions performing quasi-banking functions.
• Management of foreign currency reserves. The BSP seeks to maintain sufficient international
reserves to meet any foreseeable net demands for foreign currencies in order to preserve the
international stability and convertibility of the Philippine peso.
• Determination of exchange rate policy. The BSP determines the exchange rate policy of the
Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy such
that the role of Bangko Sentral is principally to ensure orderly conditions in the market.
• Other activities. The BSP functions as the banker, financial advisor and official depository of
the Government, its political subdivisions and instrumentalities and government-owned and -
controlled corporations.
THE MONETARY BOARD
The powers and function of Bangko Sentral are exercised by its Monetary Board, which has seven
members appointed by the President of The Philippines. Under the New Central Bank Act, one of the
government sector members of the Monetary Board must also be a member of the Cabinet designated by
the President.
The New Central Bank Act establishes certain qualifications for the members of the Monetary
Board and also prohibits members from holding certain positions with other governmental agencies and
private institutions that may give rise to conflicts of interest. With the exception of the members of the
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Cabinet, the Governor and the other members of the Monetary Board serve terms of six years and may
only be removed for cause.
The Monetary Board meets at least once a week. The Board may be called to a meeting by the
Governor of the Bangko Sentral or by two (2) other members of the Board. Usually, the Board meets
every Thursday but, on some occasions, it convenes to discuss urgent issues.
In the exercise of its authority, the Monetary Board shall:

1. Issue rules and regulations, it considers necessary for the effective discharge of the
responsibilities and exercise of the powers vested upon the Monetary Board and the Bangko
Sentral;
2. Direct the management, operations, and administration of the Bangko Sentral, reorganize its
personnel, and issue such rules and regulations as it may deem necessary or convenient for this
purpose. The legal units of the Bangko Sentral shall be under the exclusive supervision and control
of the Monetary Board;
3. Establish a human resource management system which shall govern the selection, hiring,
appointment, transfer, promotion, or dismissal of all personnel. Such system shall aim to establish
professionalism and excellence at all levels of the Bangko Sentral in accordance with sound
principles of management.
A compensation structure, based on job evaluation studies and wage surveys subject to the Board's
approval, shall be instituted as an integral component of the Bangko Sentral's human resource
development program.
On the recommendation of the Governor, appoint, fix the remunerations and other emoluments,
and remove personnel of the Bangko Sentral, subject to pertinent civil service laws: Provided, That
the Monetary Board shall have exclusive and final authority to promote, transfer, assign, or
reassign personnel of the Bangko Sentral and these personnel actions are deemed made in the
interest of the service and not disciplinary: Provided, further, That the Monetary Board may
delegate such authority to the Governor under such guidelines as it may determine;
4. Adopt an annual budget for and authorize such expenditures by the Bangko Sentral in the interest
of the effective administration and operations of the Bangko Sentral in accordance with applicable
laws and regulations; and
5. Indemnify its members and other officials of the Bangko Sentral, including personnel of the
departments performing supervision and examination functions against all costs and expenses
reasonably incurred by such persons in connection with any civil or criminal action, suit or
proceedings to which he may be, or is, made a party by reason of the performance of his functions
or duties, unless he is finally adjudged in such action or proceeding to be liable for negligence or
misconduct.
The BSP Monetary Board

Chairman Benjamin E. Diokno
Members Carlos G. Dominguez III
Felipe M. Medalla
Juan De Zuniga, Jr.
Peter B. Favila
Antonio S. Abacan, Jr.
V. Bruce J. Tolentino
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The Monetary Board exercises the powers and functions of the BSP, such as the conduct of
monetary policy and supervision of the financial system. Its chairman is the BSP Governor, with five
full-time members from the private sector and one member from the Cabinet.
The Governor is the chief executive officer of the BSP and is required to direct and supervise the
operations and internal administration of the BSP. A deputy governor (or a Senior Assistant Governor
in the case of the Currency Management Sector) heads each of the BSP's operating sector as follows:
• Monetary and Economics Sector is mainly responsible for the operations/activities related to
monetary policy formulation, implementation, and assessment
• Financial Supervision Sector is mainly responsible for the regulation of banks and other BSP-
supervised financial institutions, as well as the oversight and supervision of financial technology
and payment systems
• Currency Management Sector is mainly responsible for the forecasting, production,
distribution, and retirement of Philippine currency, as well as security documents,
commemorative medals, and medallions
• Corporate Services Sector is mainly responsible for the effective management of corporate
strategy, communications, and risks, as well as the BSP's human, financial, technological, and
physical resources to support the BSP's core functions
THE PHILIPPINE FINANCIAL SYSTEM
The financial system is widespread. Its vartious institutions touch the lives of peoples all over
the world. All individuals and organizations in a civilized society and market economy have been
directly involved in the operations of financial system. For example, we use money in buying goods
and services. We borrow money from banks, pawnshops, credit unions or even from unlicensed money
lenderes who are often called usurers.
Elements of the Financial System
Financial Claims
These are the money and the rights to receive money under specific circumstances. Usually,
these are evidenced by financial instruments which specify the terms of the claims. There are two
broad categories of claims: debt and equity. Debts are financial obligations which are to be paid and
equities are claims of ownership like shares of stock.
Financial institutions
These are private or government organization whose assets consists primarily of claims or
incomes derived from dealing in and/or performing services in connection with claims. Institutions
which deal with the creation and issuance of claims agaisnt themeselves and use the proceeds to
acquire and hold claims against others are commonly called as financial intermediaries. In simpler
terms, such institutions act as middlemen between the suppliers and users of credit.
Investors and Borrowers

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Components of the Philippine Financial System
1. Banking Institutions
a. Universal Bank
b. Commercial Bank
c. Thrift Bank
d. Specialized Government Bank
e. Cooperative Bank
f. Rural Bank
2. Non Bank Financial Institutions

a. Investment House
b. Insurance Company
c. Security Dealers/Brokers
d. Buildings and Loan Association
e. Credit Union
f. Non Stock Savings and Loan Association
g. Financing companies
h. Money Brokers
Government Non Bank Financial Institutions

1. Government Service Insurance System
2. Social Security System
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REGULATION AND SUPERVISION OF FINANCIAL INSTITUTIONS

19
Banking Laws
20
21
PHILIPPINE MONETARY POLICY
• 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
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.
• 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

22
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. The rediscounting facility allows a financial institution to borrow money
from the BSP using promissory notes and other loan papers of its borrowers as collateral.
The rediscounting facility has two categories namely, Peso Rediscount Facility and Exporters Dollar
and Yen Rediscount Facility (EDYRF). 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.
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 12 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.
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
23
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 is unable 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.
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 Philippine Statistics Authority
(PSA) formerly 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.
BSP’s Alternative Measures of Core Inflation:
o Net of Selected Volatile Items - This measure refers to the rate of change in the CPI which
excludes selected volatile CPI items besides food and oil.
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.
24
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.
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 government’s 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.
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).
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.
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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.
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 overnight deposit facilities (ODF)
and term deposit facilities (TDF) by banks; (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 BSP’s holdings of government securities. The BSP’s main policy
instrument used to signal the stance of monetary policy is the overnight reverse repurchase (borrowing)
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.
Overnight Deposit Facility – the standing overnight deposit facility absorbs 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.
Quasi-money – the sum of savings and time deposits
Rediscounting – a standing credit facility provided by the BSP to help banks meet temporary liquidity
needs by refinancing the loans they extend to their clients. Through the rediscounting facility, the BSP
also makes possible the timely delivery of credit to all productive sectors of the economy. Moreover,
26
rediscounting is one of the monetary tools of the BSP to regulate the level of liquidity in the financial
system.
Demand Deposit Account (DDA) – Represents deposits of banks and other financial institutions to
comply with the reserve requirements. It also includes banks' respective working funds to settle
transactions due to/from Bangko Sentral and with other banks in peso-denominated currency and are
subject to payment in legal tender upon demand.
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 demand
deposit account (DDA). The required reserves shall be kept in the form of deposits placed in banks' DDAs
with the BSP.
Reserve Requirement – refers to the proportion of banks’ deposits and deposit substitute liabilities that
banks are required to hold as reserves
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.This facility was
discontinued in 2016 with the introduction of the Interest Rate Corridor, and replaced by the ODF.
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
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THE BSP AND PRICE STABILITY

What is inflation?
Inflation refers to the rate of change in the average prices of goods and services typically purchased
by consumers. If inflation is low and stable, then we say that there is price stability.
Inflation is typically defined as the annual percentage change in the Consumer Price Index (CPI).
The CPI represents the average price of a standard basket of goods and services consumed by a typical
Filipino family for a given period. This standard basket contains hundreds of consumption items (such
as food products, clothing, water and electricity) whose price movements are monitored to determine the
change in the CPI, or the level of inflation.
The Philippine Statistics Authority1 (PSA) calculates and announces the monthly CPI and the rate
of inflation based on a nationwide monthly survey of prices for a given basket of commodities. The PSA
also determines the composition of the CPI basket through surveys that are conducted periodically.
Why do we want price stability?

Studies based on the experience of many countries have shown that maintaining price stability
supports economic growth because it allows households and businesses (including export enterprises) to
plan ahead and arrive at better‐informed decisions about their consumption, investment, saving and
production needs. In the case of export firms, price stability allows them to price their products
competitively, reducing the risks related to the rising cost of raw materials.
Price stability also promotes income equality by protecting the purchasing power of the poor who
often do not have assets (real or financial) that allow them to hedge against inflation.
The consensus among economists and policymakers is that the primary objective of central banks
should be to achieve price stability. Thus, since the 1990s, a growing number of countries have granted
institutional independence to their central banks and enacted laws that committed the central banks’
monetary policy to achieving price stability.
Why is the BSP the main government agency responsible for promoting price stability?
Among the various government bodies, the Bangko Sentral ng Pilipinas (BSP) is uniquely
qualified to promote price stability because it has the sole ability to influence short‐term market interest
rates. By influencing short‐term interest rates, the BSP is able to affect the demand of households and
firms for various goods and services. Domestic demand and the aggregate supply of goods and services
determine the general price level.
1 Under RA 10625, s. 2013 (otherwise known as the Philippine Statistical Act of 2013), the Philippine Statistics Authority (PSA) was created to be primarily responsible
for all national censuses and surveys, sectoral statistics, consolidation of selected administrative recording systems and compilation of the national accounts. Effective
29 December 2013, the PSA shall constitute all the major statistical agencies of the government such as the National Statistics Office (NSO); the National Statistical
Coordination Board (NSCB); the Bureau of Agricultural Statistics (BAS); and the Bureau of Labor and Employment Statistics, (BLES).
28
In addition, as the Philippines’ central monetary authority, the BSP is tasked to promote price
stability conducive to balanced and sustainable economic growth. This is mandated by law under the
provisions of Republic Act No. 7653, also known as the New Central Bank Act, which was passed into
law on 10 June 1993. Achieving price stability is a universal goal shared by central banks and monetary
authorities all over the world.
This does not mean, however, that the BSP pursues price stability to the exclusion of other
objectives. Although the price stability objective is the BSP’s main priority, other economic goals—such
as promoting financial stability and achieving broad‐based, sustainable economic growth—are given
consideration in policy decision‐making. Thus, the BSP coordinates with other
government agencies to make sure that its policies are part of a consistent and coherent overall policy
framework.
What is the BSP’s role in relation to inflation?
The BSP controls inflation through its conduct of monetary policy which is done primarily by
moving its policy interest rate. Adjustments in the interest rate for the BSP’s overnight reverse repurchase
(RRP) facility, the primary monetary policy instrument, typically leads to corresponding movements in
market interest rates, thus affecting the demand by households and firms for goods and services. This,
together with the aggregate supply of goods and services, determines the level of prices.
Nevertheless, movements in inflation can be driven by factors beyond the influence of the central
bank, and this often poses challenges for the BSP’s conduct of monetary policy. The inflation targeting
framework of the BSP recognizes these factors, which can include inflation 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; and (d) significant government policy changes
that directly affect prices such as changes in the tax structure, incentives, and subsidies.
MONETARY POLICY AND ITS CURRENT FRAMEWORK

What is monetary policy?
Monetary policy is a set of measures or actions implemented by the central bank to affect the supply
of money and credit 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, in support of its key
objective of keeping inflation low and stable.
How does the BSP implement monetary policy?
The BSP implements monetary policy using various instruments to achieve the inflation target set
by the National Government.
The primary monetary policy instrument of the BSP is the overnight RRP rate. The RRP rate is
the rate at which the BSP borrows money from commercial banks within the country. The BSP raises or
reduces its overnight RRP rate depending on the BSP’s assessment of the outlook for inflation and GDP
growth, and in doing so, implements its monetary policy stance. If the BSP perceives the inflation forecast
to exceed the target, then it can implement contractionary monetary policy by raising its policy interest
rate. On the other hand, if the BSP sees the inflation forecast to be lower than the target or there is need
to increase liquidity in the financial system, then it can implement expansionary monetary policy by
reducing its policy interest rate.
To contract or expand liquidity in the financial system, the BSP can also do the following actions:
29
• increasing/decreasing the reserve requirement;

• encouraging/discouraging deposits in the overnight deposit facility (ODF) and term deposit
facility (TDF) by banks;
• increasing/decreasing the rediscount rate on loans extended by the BSP to banking institutions
on a short‐term basis against eligible collaterals of banks’ borrowers; and
• outright sales/purchases of the BSP’s holdings of government securities.
2. What is the basic approach to monetary policy in the Philippines?
The BSP uses the inflation targeting framework as its basic approach to monetary policy. Under
this approach, the BSP announces an explicit inflation target and strongly commits to achieving it over
a policy horizon using various monetary policy instruments. The inflation targeting approach that is
currently adopted by the BSP formally replaced the monetary aggregate targeting approach in January
2002.
The monetary aggregate targeting approach is based on the assumption of a stable and predictable
relationship between money, output, and inflation. On the assumption that the money velocity2 remains
stable over time, changes in money supply are directly related to price changes or to inflation. Given the
desired level of inflation consistent with economic growth objectives, it is assumed that the BSP can
determine the level of money supply needed; thus, the BSP indirectly controls inflation by targeting
money supply. In the second semester of 1995, the monetary aggregate targeting approach was modified
to put greater emphasis on price stability instead of rigid adherence to the targets set for monetary
aggregates. The modified framework also aimed to address the inability of monetary targeting to account
for the long- and variable-time lag in the effects of monetary policy on the economy. Under the modified
approach, the BSP can exceed the monetary targets as long as the actual inflation rate is kept within
program levels. Also, policymakers monitor a larger set of economic variables in making decisions
regarding the appropriate monetary policy stance that includes movements in key interest rates, the
exchange rate, domestic credit and equity prices, indicators of demand and supply, and external
economic conditions, among other variables.
THE SHIFT TO INFLATION TARGETING

What is inflation targeting?
On 24 January 2000, the Monetary Board, the BSP’s policy‐making body, approved in principle the
shift by the BSP to inflation targeting as a framework for conducting monetary policy. Inflation targeting
focuses mainly on achieving price stability as the ultimate objective of monetary policy. With this
approach, the central bank announces an explicit inflation target and promises to achieve it over a given
time period. The target inflation rate is set and announced jointly by the BSP and the government through
an inter‐agency body. Although the responsibility of achieving the target rests primarily with the BSP,
this joint announcement reflects active government participation in achieving the goal of price stability
and government ownership of the inflation target.
Under inflation targeting, the central bank compares actual headline inflation against inflation
forecasts. The central bank uses various monetary policy instruments at its disposal to achieve the inflation
target. In the Philippines, this involves mainly adjustments in the BSP’s key policy interest rate. The BSP
also uses other instruments such as rediscounting and reserve requirements. The BSP provides regular
2 The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time.
30
reports explaining its policy decisions, assessment of the inflation environment, and inflation outlook. If
the central bank fails to meet the inflation target, it is required to explain to the public why the target was
not met and come up with measures on how to steer inflation towards the target level.
The BSP formally adopted inflation targeting as the framework for monetary policy in January 2002.
The Philippines joined a long list of inflation targeters such as Australia, Canada, Finland, Sweden, New
Zealand, the United Kingdom, Israel, Brazil, Chile and Thailand, which have moved from high inflation
to low inflation following the successful implementation of inflation targeting in their countries.
What are the features of inflation targeting?
Over the past two decades, financial deregulation and liberalization resulted in the introduction of
new products and changes in the structure of the financial system. These changes, however, appeared to
have weakened the traditional relationship linking money supply to income and prices. This has prompted
many central banks, including the BSP, to review their approach to monetary policy.
Like other central banks, the BSP recognized the important features of inflation targeting as
follows:
• simple framework which can, therefore, be easily understood by the public;
• allows greater focus on the goal of price stability, which is the primary mandate of the BSP;
• forward‐looking and recognizes that monetary policy actions affect inflation with a lag;
• reflects a comprehensive approach to policy by taking into consideration the widest set of
available information about the economy;
• promotes transparency in the conduct of monetary policy through the announcement of targets
and the reporting of measures that the BSP will adopt to attain these targets, as well as the
outcomes of its policy decisions;
• increases the accountability of monetary authorities to the inflation objective since the announced
inflation target serves as a yardstick for the performance of the BSP, and thus helps build its
credibility; and
• does not depend on the assumption of a stable relationship between money, output and prices,
and can still be implemented even when there are shocks that could weaken the relationship.
What are the requirements for the successful adoption of inflation targeting?
The success of implementing inflation targeting as the framework for monetary policy depends on
the following preconditions that complement and reinforce each other:
• Firm commitment to price stability. The primary objective of the central bank is to maintain price
stability that is conducive to a balanced and sustainable economic growth. As such, the central
bank should not be bound by multiple objectives such as financing the government’s deficit,
keeping the exchange rate at a given level, or other policy agenda of the government unless these
are necessary to achieve the goals of price stability.
• Central bank independence. The central bank must be able to conduct monetary policy without
political interference. It must be able to use whatever monetary policy instrument is needed to
achieve price stability. The central bank should also have fiscal independence, i.e., it must not be
constrained by the need to finance the fiscal deficit.
31
• Good forecasting ability. The central bank should have a good statistical model for forecasting
inflation.
• Transparency. The central bank should promote transparency by communicating clearly to the
public its policy actions and the reasons behind them.
• Accountability. There should be accountability on the part of the central bank should actual
inflation deviate from the target.
• Sound financial system. The financial system should be fundamentally sound to make monetary
policy more effective in influencing output and prices. The financial system acts as the
intermediary by which the BSP influences the supply of money and credit in the economy.
10. Does the Philippines satisfy all the requirements of inflation targeting?
As the table below suggests, the basic requirements for the successful adoption of inflation
targeting are already in place in the Philippines.
Requirements for the Adoption

Is it in place in the Philippines?
of Inflation Targeting
Yes, the law provides fiscal and

administrative
Central Bank independence
independence to the BSP as the
central monetary authority.
Yes, the law mandates that the BSP should
Central Bank commitment be concerned primarily with maintaining
price stability.
Inflation forecasting models are

continuously being improved; these are
Good forecasting ability supplemented by judgment and discretion
given available economic and financial
indicators.
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In addition to existing reports and

publications, the BSP also publishes the
Transparency Inflation Report and the minutes of relevant
Monetary Board discussions on monetary
policy (with a lag).
The BSP stands firmly behind the inflation

target and, should there be any deviations,
Accountability explains the reasons to the public and higher
authorities.
The financial system is constantly

developing, partly in view of the measures
Sound financial system
implemented by supervisory authorities to
strengthen it.
MAKING INFLATION TARGETING OPERATIONAL IN THE PHILIPPINES
How did the BSP make the shift to inflation targeting?
Since 2002, the BSP has observed the following operational process in its implementation of
inflation targeting.
INFLATION TARGETING FFRAMEWORK

BSP
Government sets inflation Publishes highlights of MB
target 2 years in advance
meetings on monetary policy
(in consultation with BSP) YES
discussions
2019 ‐ 2022: -3.0%±1% •
Publishes
•
Inflation Report
Release press statement
Is
inflation forecast
in line with
BSP announces
target?
inflation target
BSP issues Open letter

NO to the President
BSP
Assesses monetary
• conditions Adjust policy interest rate
• Forecasts inflation
• Use other monetary
Deliberates on the policy instruments
monetary policy stance
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• Setting of the inflation target. The target‐setting process is largely based on the existing
framework for coordination among government economic agencies under the Development Budget
Coordinating Committee (DBCC), an inter‐agency body responsible for setting the annual government
targets for macroeconomic variables, particularly the Gross National Income (GNI) and Gross Domestic
Product (GDP) growth rates and inflation, which are important inputs in the formulation of the revenue,
expenditure and financing programs of the National Government. The National Government, through the
DBCC, sets the inflation target two years ahead in consultation with the BSP. The inflation target is
defined in terms of the average yearon‐year change in the CPI over the calendar year. The BSP Governor
makes the public announcement of the inflation target in line with the BSP’s commitment to greater
transparency and accountability in its conduct of monetary policy.
When the BSP adopted the inflation targeting framework in 2002, the inflation target was defined
in terms of a range (e.g., the target range for 2006‐2007 was 4.0‐5.0 percent). In December 2006, the
Government’s inflation target was re‐specified from a range target to a point target with a tolerance
interval of ±1 percentage point starting in the target for 2008. The inflation target for 2010 was 4.5 percent
±1 percentage point (or a range equivalent to 3.5‐5.5 percent); while the target for 2011 was 4.0 percent
±1 percentage point (or a range equivalent to 3.0‐5.0 percent). On 15 July 2010, the Monetary Board
announced the BSP’s shift from a variable annual inflation target to a fixed inflation target of 4 ± 1 percent
for the medium term starting from 2012 to 2014, which was approved by the DBCC on 9 July 2010 under
DBCC Resolution No. 2010‐3. This shift from a range target to a point target with a tolerance interval
effectively widens the BSP’s target band. A broader target band is seen to provide added flexibility to
monetary authorities in steering inflation. It helps ensure that the design of the inflation target is more
consistent with the country’s economic circumstances, and safeguards the credibility of the inflation
targeting framework. It also helps align monetary policy practices in the Philippines with those in other
inflation targeting countries.
The inflation target was set at 4.0 +/‐ 1.0 percent for 2013‐2014, and at 3.0 percent ± 1.0 percent
for 2015‐2016 and 2017‐2018. Meanwhile, through DBCC Resolution No. 2019‐2 dated 26 February
2019, the DBCC decided to keep the current inflation target at 3.0 percent ± 1.0 percent for 2019‐2020
and set the inflation target at the same range for 2021‐2022 based on the assessment that the current target
continues to be an appropriate quantitative representation of the medium‐term goal of price stability that
is optimal for the Philippines given the current structure of the economy and outlook of macroeconomic
conditions over the next few years.
Under the inflation targeting framework, the inflation target is different from the inflation forecast.
The inflation target represents policymakers’ desired inflation rate, which they commit to achieve over
the policy horizon. Inflation targets, because of their institutional nature, tend to be less susceptible to
revisions — although countries with a history of high inflation tend to set a decelerating path for inflation
targets across several years. Meanwhile, the inflation forecast represents the expectation or prediction of
the inflation rate over the policy horizon, given current and available information. The inflation forecast
can change over time as important new information is incorporated in the assessment of future inflation.
The forecast is a major factor considered by monetary authorities when deciding on whether monetary
policy instruments should be adjusted to attain the inflation target.
• Measure of inflation. The BSP uses the rate of change in the CPI in expressing its target for
monetary policy. Also known as the “headline” inflation rate, the rate of change in the CPI is a commonly
34
used and widely known measure of inflation. It is also monitored by an independent statistical agency
namely, the PSA, thereby ensuring data integrity, and is announced to the public with a relatively short
time lag. The CPI itself represents the average price of a standard “basket” of goods and services
consumed by a typical family. In the Philippines, this CPI is composed of various consumer items as
determined by the nationwide Family Income and Expenditure Survey (FIES) conducted every six years
by the PSA.
In conducting monetary policy, the BSP also monitors “core” inflation. Historically, the CPI inflation
tends to be affected by the transitory effects of volatile price movements of certain commodity
components. Temporary shocks or disturbances in certain areas of the economy, often attributed to factors
outside the direct control of economic policy such as oil price shocks, may cause fluctuations in the CPI
inflation that may not necessarily require a monetary response. By eliminating the impact of such
disturbances on price data, core or underlying inflation serves as a useful alternative indicator of the path
of inflation. The PSA computes the core inflation by excluding selected unprocessed food and energy‐
related items from the CPI.
• Models for inflation forecasting. The BSP uses a suite of quantitative macroeconomic models
to forecast inflation over a policy horizon of two years. These economic models are also employed in
conducting policy simulations and analysis. Based on statistical tests, these models track the actual
inflation outcomes reasonably well. The BSP continuously exerts efforts to develop new economic
models and to refine its existing macroeconomic models for forecasting inflation and other
macroeconomic variables to address the growing demands of policy studies.
• Meetings on monetary policy. Starting in 2012, the Monetary Board (MB) has held 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. Based on its assessment of the macroeconomic environment and the price situation of
commodities, the Monetary Board takes the necessary actions consistent with the chosen monetary policy
stance. These actions would involve the use of various instruments discussed in Item No. 6. The decisions
of the Monetary Board concerning monetary policy are determined by a majority vote. The votes of
individual Board members are not publicly disclosed to emphasize the collegial, consensus‐based nature
of the decision‐making process.
To strengthen the decision‐making process, the Monetary Board of the BSP receives
recommendations from the Advisory Committee (AC). The AC is the technical body composed of the
following members: (1) the BSP Governor, who serves as Chairman; (2) the Deputy Governor for
Monetary and Economics Sector; (3) the Deputy Governor for Corporate Services Sector; (4) the Deputy
Governor for Financial Supervision Sector; (5) the Senior Assistant Governor of the Financial Market
Operations Sub‐Sector; (6) the Assistant Governor of the Office of Systemic Risk Management; and (7)
the Assistant Governor of the Monetary Policy Sub‐Sector. The AC meets regularly a few days prior to
each MB monetary policy meeting. The AC meetings serve as a forum for in‐depth, comprehensive, and
balanced assessment of monetary conditions, the economic outlook, inflation expectations and the forecast
inflation path. The AC members agree, by a majority vote, on a set of recommendations which are
submitted to the Monetary Board.
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• Transparency and accountability mechanisms. The BSP has a number of disclosure and
reporting mechanisms to help the public gauge the BSP’s commitment to achieve the inflation target. In
addition to various reports and publications, the BSP publishes the Quarterly Inflation Report and the
Highlights of the Meeting of the Monetary Board on Monetary Policy. The BSP also holds regular
seminars and conferences involving the discussion of monetary developments and policy issues.
To ensure accountability in case the BSP fails to achieve the inflation target, the BSP Governor
issues an Open Letter to the President explaining the reasons why actual inflation did not fall within the
target, along with the steps to be done 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, 20 January 2017, and 25 January 2019.
• Explanation clauses, or exemptions to the inflation target. Explanation clauses refer to the
predefined set of acceptable circumstances under which an inflation‐targeting central bank like the BSP
may fail to achieve its inflation target. These exemptions recognize that the limitations to the effectiveness
of monetary policy and deviations from the inflation target may sometimes occur due to factors beyond
the control of the central bank. They include price pressures arising from: (1) volatility in the prices of
agricultural products; (2) natural calamities or events that affect a major part of the economy; (3) volatility
in the prices of oil products; and (4) significant government policy changes that directly affect prices such
as changes in the tax structure, incentives and subsidies. In using explanation clauses, the BSP will have
to explain carefully and clearly to the public how the abovementioned factors caused the deviation of the
inflation outcome from the target. The BSP also cites the actions to be taken as well as the length of time
entailed to achieve the inflation target.
Since the BSP adopted inflation targeting, has the inflation target been achieved?
Below is the summary of inflation developments since the BSP shifted to inflation targeting
framework, indicating among others, the actual inflation compared to the target.
Actual Inflation Actual

Inflation Target vs.
Year Developments/Factors affecting inflation
(in (in Target
percent)1 percent)2
Slowdown in food inflation and subdued
2002 3.0* 4.5‐5.5 Lower
demand‐pull inflationary pressures
36
• Absence of significant demand‐driven

pressures with the continued soft spots in
overall demand, soft labor market
conditions, and moderate capacity
utilization in industries such as
2003 3.0 4.5‐5.5 Lower
manufacturing
• Easing cost‐push inflationary pressures

with the abatement of the El Niño
phenomenon and the downtrend in
international oil prices
• Supply‐side shocks including the increase
in global oil prices (which led to higher
domestic pump prices of petroleum
products and hikes in transport fares) as
well as the spate of typhoons and domestic
2004 5.5 4.0‐5.0 Higher
supply constraints affecting the
availability of certain food products
• Higher meat prices linked to the recurrence

of avian flu in other countries
• Continued rise in consumer prices

particularly those for food, energy, and
transportation
• Global increase in oil prices leading to

2005 7.6 5.0‐6.0 Higher higher domestic pump prices,
adjustments in minimum wage
throughout the country, as well as hikes in
the transport fares and utility charges
• Adverse effect of El Niño dry weather on

agricultural output, especially on rice and
corn production
37

(in (in Target
percent)1 percent)2
Higher world oil prices, the two‐
percentage point increase in the VAT,
2006 6.2 4.0‐5.0 Higher
and the removal of certain VAT
exemptions in 2005 itenerary
• Generally stable prices for major food

items, favorable supply conditions,
particularly the sustained growth in
agriculture, and the subsiding base effect
of the RVAT on CPI
2007 2.9 4.0‐5.0 Lower
• Firm peso tempering the impact on
domestic prices of increasing global
commodity prices, including food and
oil, which rose during the latter part of
the year
• Confluence of global and supply‐side

factors beyond the direct control of the
BSP such as the big surge in the
international prices of oil and food
commodities, resulting in higher
domestic rice and pump prices of fuel
2008 8.3 4.0±1 Higher
• Supply shocks over a longer period,
which contributed to second‐round
effects, affected wage and price‐setting
behavior of businesses and households;
inflation expectations also rose
38
• Slowdown in inflationary pressures during

the early until the middle part of the year
owing to lower oil and other commodity
prices due, in large part, to subdued
demand conditions
2009 4.2 3.5±1 Within • Slight uptick in consumer prices towards

the latter part of the year, particularly
those for food and petroleum products,
due to weather disturbances and lifting of
price cap on petroleum products

(in (in Target
percent)1 percent)2
• Food inflation was lower especially in

the first half of the year as domestic
supply recovered from the impact of the
previous year’s typhoons. It posted an
uptick in the third quarter as prices of
agricultural commodities went up; in
particular, sugar prices increased as El
2010 3.8r 4.5±1 Within
Niño affected the harvest and delayed
the milling season.
• This was more than offset by higher non‐

food inflation which can be traced to the
surge in the prices of electricity and
petroleum products.
39
• Food inflation was generally stable as

ample supply in the aftermath of
typhoons tempered the price increases,
despite supply shocks triggered by
weather‐related factors which
resulted in production
disruptions and agricultural damages
thus initially pushing food inflation
2011 4.6r 4.0±1 Within
higher.
• Meanwhile, non‐food inflation trended

upwards during the year as domestic
prices of petroleum crude tracked the
movement in the international market.
Adjustments in electricity and water
rates also contributed to the increase.
• Food inflation decelerated as domestic

supply remained sufficient.
• Lower non‐food inflation, particularly for

electricity, gas and other fuels as well as
transportation, was also posted. The
reduction in power generation charges in
2012 3.2 4.0±1 Within March, September, and December
contributed to the decline.

(in (in Target
percent)1 percent)2
40
• Inflation was higher during the first

quarter as prices of food and alcoholic
beverages increased due to weather‐
related production disruptions and the
implementa‐tion of the Sin Tax Reform
Act of 2012. Meanwhile, inflation
decelerated in July and August due to the
reduction in prices of domestic petroleum
products and power rates.
2013 3.0 4.0±1 Within • However from September and towards the
end of 2013, tight supply conditions
caused by weather‐related disruptions and
stronger demand during the holiday season
pushed food inflation higher. Likewise,
non‐food inflation rose due to the upward
adjustment in electricity rates brought by
the maintenance shutdown of Malampaya
Gas Field and other generating plants
coupled with increases in the prices of
gasoline, diesel, LPG and kerosene.
• Food inflation slowed down in Q4 2014

amid adequate domestic supply of major
food items, easing port congestion, and
moderate prices of imported commodities
as compared with the higher food inflation
during the first nine months of 2014
brought by weather‐related production
disruptions, bottlenecks in the supply
2014 4.1 4.0±1 Within chain caused by port congestion, and
changes in transportation policies.
• Likewise, non‐food inflation eased due to

lower prices of electricity, gas, and other
fuels (reflecting declines in international
oil prices), which is in contrast to the high
non‐food inflation during the first three
quarters.
41

(in (in Target
percent)1 percent)2
• Easing petroleum prices and ample food

supply contributed largely to the low
inflation readings during the year.
• Inflation gained momentum in the fourth

quarter of the year, traced mainly to
2015 1.4 3.0±1 Below seasonal demand for certain food items as
well as the adverse impact of recent
typhoons on food supply.
• Non‐food inflation likewise inched higher

owing in part to passenger fare increases
for air and sea transport.
42
• Monthly inflation rates for the first eight

months of 2016 fell below the target range
due to lower food and energy prices.
Inflation gained traction starting
September to December, exceeding the
lower bound of the target as weather‐
related production disruptions pushed up
inflation of key food items such as
vegetables and fruit and as the rebound in
international oil prices in late 2016 pushed
up the prices of domestic petroleum
products.
• Non‐food items: The price indices for non‐

2016 1.8 3.0±1 Below food items (which include recreation and
culture, and restaurants and miscellaneous
goods and services) and alcoholic
beverages and tobacco recorded an
increase in average inflation rates. On the
other hand, the inflation for housing,
water, electricity, gas and other fuels
continued to decline during the year.
• Food items: Inflation rate of food and

non‐alcoholic beverages was unchanged
in 2016 as higher price increases in
vegetables, meat as well as oils and fats
offset the year‐onyear decline in rice
prices.

(in (in Target
percent)1 percent)2
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Inflation rose during the first quarter of

2017 due to an increase in both food and
non‐food inflation. Food inflation went
up owing to some tightness in domestic
supply conditions, while the higher non‐
food inflation was attributed to upward
adjustments in electricity rates and
domestic petroleum prices. Meanwhile,
inflation held steady in the second and
2017 3.2 3.0±1 Within third quarter of the year as food and non‐
food inflation were generally stable.
Inflation gained traction in the fourth
quarter due to upward adjustments in the
prices of domestic petroleum products as
well as higher price increases in selected
services. Nonetheless, inflation averaged
at 3.2 percent in 2017, well within the
National Government’s announced target
range of 3.0 percent ±1.0 percentage
point for the year.
Headline inflation increased year‐on‐

year during Q1 and Q2 2018 due largely
to the uptick in selected food and non‐
food prices. During the first two quarters
of 2018, food prices went up owing
mainly to weather‐related food supply
disruptions, while non‐food prices
generally rose due to upward adjustments
in electricity rates. For the third quarter of
2018, headline inflation also rose owing
2018 5.2 3.0±1 Above to higher food and energy prices.
Nonetheless, headline inflation
moderated to 5.9 percent in Q4 2018
from 6.2 percent in the previous quarter
as both food and non‐food inflation eased
due to improved supply conditions and
lower international oil prices. This
brought the full year average inflation to
5.2 percent, which is above the National
Government’s (NG) announced target
range of 3.0 percent ± 1.0 percentage
point for 2018.
44
Headline inflation decreased year‐on‐

year during Q1 and Q2 2019 as food
inflation eased due to sufficient domestic
food supply, while non‐food inflation
also moderated. Inflation settled at 3.8
percent and 3.0 percent during Q1 and Q2
2019, respectively. Headline inflation
eased further during the second half of
2019 to 1.7 percent during Q3 and 1.6
percent during Q4. The lower inflation
2019 2.5 3.0±1 Within
figures can be attributed to the slowdown
in food and nonfood inflation during the
quarter. The average inflation rate for
2019 was recorded at 2.5 percent, which
was well within the National
Government’s (NG) announced target
range of
3.0 percent ± 1.0 percentage point for the
year.
45
• Year‐on‐year headline inflation rose to 2.7

percent in Q1 2020, higher than the 1.6
percent in Q4 2019 but within the National
Government’s (NG) target range of 3.0
percent ± 1.0 percentage point for the
year. The higher inflation rate could be
attributed to price increases for selected
food and non‐food items during the
quarter. Similarly, core inflation was
higher at 3.2 percent in Q1 2020 from 2.7
percent in the previous quarter.
• Food inflation increased as prices of prime
commodities such as fish went up due
partly to the fishing ban imposed in certain
provinces. Likewise, inflation for fruits
and vegetables were also higher during the
review quarter owing to weather‐related
2020 2.7* 3.0±1 Within supply disruptions.
Year‐on‐year inflation for rice, corn, as
well as sugar and other sweetened items
continued to decline in Q1 2020, while
inflation for tobacco remained elevated
following the implementation of the
higher excise tax on tobacco products.
• Non‐food inflation also accelerated in Q1
2020 driven largely by the turnaround in
transport inflation. Year‐on‐year inflation
for operation of personal transport
equipment went up while the approved
fare hikes for public utility jeepneys
(PUJs) minimum fare in selected
provinces also exerted some upward
pressure
on inflation for transport services.
1 Actual inflation figures used for 2002‐2004, 2005‐2006, 2007‐2017, and 2018 were the 1994‐, 2000‐,
2006‐, and 2012‐based CPI series, respectively.

2 Annual targets
*January to March 2020

**Note on revision of the 2002 inflation rate: 1994‐based annual inflation for 2002 was originally
published at 3.1 percent; however, later CPI revisions placed it at 2.9 percent based on BSP
computations, which at the time used expanded decimal form when averaging cumulative CPI figures.
However, PSA (formerly NSO) treatment of cumulative inflation is to round off CPI to one decimal
prior to computing for the annual percent change. BSP only adopted similar practice around 2012‐
2013. To be consistent with PSA practice, the 2002 inflation rate was revised to 3.0 percent from 2.9
percent previously.
46
Actual vs. TargetInflation

(year‐on‐year in percent; 2012=100)
12
2020 Inflation Target: 3 percent ±1.0 percentage point

10
2020 YTD (Jan ‐Mar) Headline Inflation: 2.7 percent
Actual Headline Inflation
8 Target Range
Core Inflation
‐2
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1. What are interest rates?
Generally, interest rates are prices. These are the price paid for the use of money for a period of
time and are expressed as a percentage of the total outstanding balance that is either fixed or variable.
There are two ways by which interest rate can be defined: first, from the point of view of a borrower, it is
the cost of borrowing money (borrowing rate); and second, from a lender’s point of view, it is the fee
charged for lending money (lending rate).
2. How are interest rates classified?
The interest rates charged on borrowed funds are generally classified according to the tenor or the
maturity period: short‐term (less than one year); medium‐term (more than one year but less than five
years); and long‐term (more than five years). Interest rates differ, depending on the type of instruments
(e.g., traditional deposit instruments like savings deposit, time deposit, and some demand or current
accounts, and investment instruments like bonds, securities) and on the tenor of investment.
3. What are real interest rates?
Real interest rates are interest rates adjusted for the expected erosion of purchasing power resulting
from inflation. Real interest rates are what matter to households’ consumption and firms’ investment
decisions, which collectively constitute aggregate demand. Demand for goods and services cannot be
directly controlled by nominal interest rate. Instead, demand is also affected by expected inflation. Being
the main supplier of bank reserves, a central bank can only set the short‐run nominal policy rate, which
serves as the benchmark for market interest rates. A central bank cannot set the real interest rates because
it cannot set inflation expectations. One may therefore wonder how an adjustment in short‐run nominal
interest rate can affect consumption and investment decisions, which are carried out over a longer horizon.
The answer lies in the fact that central bank’s policy action can influence not only the market rates but
also inflation expectations. Thus, by signaling its policy intent through nominal policy rate adjustment,
the central bank can affect the real return on funds faced by households and firms. For example, a
P1,000,000 investment with nominal 10 percent annual return will give the investor at the end of the year
P1,100,000, i.e., 1,000,000(1+.010). With 5 percent annual inflation, the real value of the investment is
P1,047,617, i.e., 1,100,000/(1+0.05). The real return is therefore 4.8 percent. This is given by r = (i‐
π)/(1+π) (where r is real interest rate, i is nominal interest rate and π is inflation rate). At low rates of
inflation, this can be approximated by r=i‐π.
4.What is the yield curve?
The yield curve is what economists use to capture the overall movement of interest rates (which is
also known as “yields” in Wall Street parlance). Plot the day’s yield for various maturities of Treasury
bills (T‐bills) and bonds on a graph and you have the day’s yield curve. As can be seen from the chart
under the secondary market, the line begins on the left with the 3‐ month T‐bills and ends on the right with
the 25‐year T‐bonds. Government T‐bills and bonds are issued through yield auctions of new issues to
generate cash for the National Government (NG). This is referred to as the primary auction market.
Secondary trading, on the other hand, is carried out in over‐the‐counter (OTC) market. In the secondary
market, the most recently auctioned Treasury issue is considered current or on‐the‐run. Current issues are
more actively traded and more liquid, hence, they typically trade at lower yields.
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As of end‐March 2020, the yields for government securities (GS) in the secondary market rose
generally (except for the 10‐year and 20‐year GS) relative to the end‐December 2019 levels, given the
increase in market uncertainties over (i) the economic impact of the coronavirus pandemic and the
corresponding quarantine measures imposed by governments around the world; (ii) the eruption of Taal
volcano in January; and (iii) geopolitical concerns between the US and Iran at the beginning of the quarter.
Debt paper yields were higher by a range of 5.8 bps for the 6‐month GS to 73.1 bps for the 2‐year GS
compared to end‐December 2019 levels. Meanwhile, secondary market yields for the 10‐year and 20‐year
GS declined by 15.0 bps and 9.8 bps, respectively
Yields of Government Securities in the Secondary Market
In percent
5. How are interest rates determined?
Today, the level of interest rates is determined by the interaction of the supply and demand for
funds in the money market. Interest rates, prior to their full liberalization in 1983, were fixed by the
Bangko Sentral ng Pilipinas (BSP). In 1981, the Central Bank of the Philippines deregulated all bank rates
except short‐term lending rates. In 1983, the deregulation of bank rates was completed with the removal
of the remaining ceilings on short‐term lending rates.
49
6. What is the BSP’s policy on interest rates? Does the BSP regulate the interest rate charged by banks,
lending investors and pawnshops?
Since 1983, the BSP has followed a market‐oriented interest rate policy. That is, it allows the
market to set its own rates. Thus, the BSP does not regulate the interest rate charged by banks, lending
investors and pawnshops. However, for transparency purposes, the BSP requires that the interest rates
applied must be duly indicated on the pawn ticket in case of pawnshops, the promissory note in the case
of lending investors, and loan agreements in the case of bank loans. The Monetary Board only sets rates
for the BSP’s overnight borrowing and lending facility to influence the timing, cost and availability of
money and credit, for the purpose of stabilizing the price level.
7. Can the BSP intervene so that banks will not charge very high lending rates?
The BSP’s past experience with rate‐setting made apparent the limitations of an administratively
fixed interest rate. For this reason, the BSP shifted to a market‐oriented interest rate policy in 1983. The
re‐imposition of rate ceilings or limits on the spread between the T‐bill rate and lending rate will only
introduce distortions in the credit market, including: a) the pricing of credit outside of the fundamental
issue of risk; b) the exclusion of certain segments of the economy from the market; c) the need to also
regulate other banking products and services; and d) the increased burden on bank supervision. After the
Asian crisis, however, the Banker’s Association of the Philippines (BAP) decided to implement a
gentleman’s agreement to maintain a cap on the spread of bank lending rate of up to a maximum of five
(5) percent over the 91‐day T‐bill rate in the secondary market. A review of the spread between the average
monthly bank lending rate charged by commercial banks (both high‐ and low‐end) and the 91‐day T‐bill
rate showed that banks are generally in compliance with the 500‐basis point cap.
8. Can the BSP set interest rate levels?
Yes, by law, the BSP can effectively set interest rates. Under the Usury Law (Act No. 2655, as
amended by P.D. 116), the Monetary Board can prescribe the maximum interest rates for loans made by
banks, pawnshops, finance companies and similar credit institutions, and to change such rates whenever
warranted by prevailing economic conditions. Moreover, the BSP charter (R.A. No. 7653) allows the
Monetary Board to take appropriate remedial measures whenever abnormal movements in monetary
aggregates, in credit or in prices endanger the stability of the Philippine economy. Nevertheless, since
1983, the BSP has followed a market‐oriented interest rate policy.
9. What factors influence the rise and fall in interest rates?
Interest rate movements in the Philippines are affected generally by the price level or inflation rate,
fiscal policy stance, and intermediation cost which could impact the demand and supply for money.
Inflation rate. The BSP’s policy direction to achieve its mandate of maintaining price stability has
a marked influence on the interest rate level. When there is too much liquidity in the system, there is more
pressure for inflation to rise. To curb inflationary pressures arising from excess liquidity in the system,
the BSP will have to increase its key policy rates, i.e., overnight borrowing rate or reverse repurchase rate
(RRP) and overnight lending rate or repurchase rate (RP). By increasing its key policy rates, the BSP is
sending a signal to the market that the general level of interest rates will be on an uptrend. In mirroring
the movement of the BSP’s policy rates, the benchmark 91‐day Tbillrate also sets the direction for other
rates, specifically, bank lending rates.
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Fiscal policy stance. The fiscal policy stance may also influence the direction of interest rates. A
government that incurs a fiscal deficit needs to finance its existing budgetary requirements by borrowing
from the domestic market or from abroad. The higher is the fiscal deficit, the stronger the demand to
borrow to finance the gap. This exerts upward pressure on domestic interest rates, particularly if the
government borrows from a relatively less liquid domestic market.
Intermediation cost. Financial institutions incur costs in extending their services. Interest rates will
tend to be high when intermediation cost is high. Included in the intermediation costs are administrative
costs and the BSP’s reserve requirements. Other factors that could influence the interest rates include the
maturity period of the financial instrument and the perception of risks associated with the instrument.
Those with longer‐term maturity and with higher probability of incurring loss carry higher interest rates.
The lack of intermediation could also affect interest rate movement. For instance, with their larger holdings
of non‐performing assets (NPAs), banks are more cautious in their lending activities. This would tend to
induce an increase in interest rates.
10. What is an interest rate corridor (IRC) and how does it promote more stable interest rates?
An IRC is a system for guiding money market rates towards central bank (CB) target/policy rate.
It consists of a rate at which the CB lends reserves to banks and a rate at which it takes deposits from
them, with the CB policy/target rate set in the middle.
The IRC system consists of the following instruments: standing liquidity facilities, namely, the
overnight lending facility (OLF) and the overnight deposit facility (ODF); the overnight reverse
repurchase (RRP) facility; and a term deposit auction facility (TDF). The interest rates for the standing
liquidity facilities form the upper and lower bounds of the corridor, while the overnight RRP rate is
currently set in the middle of the corridor. The repurchase (RP) and Special Deposit Account (SDA)
windows were replaced by standing OLF and ODF, respectively. Meanwhile, the RRP facility was
modified to a purely overnight RRP. In addition, the TDF serves as the main tool for absorbing liquidity.
The key benefit of the adoption of an IRC system in the Philippines is the strengthening of
monetary policy transmission by ensuring that money market interest rates move within a reasonable range
around the BSP’s policy rate. Upon the implementation of the IRC, the BSP narrowed the width of the
corridor from 350 basis points to 100 basis points (+ 50 basis points). This narrower corridor will help
limit potential interest rate volatility. The new IRC system is also seen to confer other benefits over time.
It is expected to promote greater interbank market activity by encouraging banks to undertake their day‐
to‐day liquidity management more actively as BSP monetary operations gradually exert a stronger
influence on short‐term liquidity conditions. Moreover, the offering of the TDF is expected to promote
the establishment of benchmarks for short‐term interest rates. Increased activity and better pricing in
money market rates, in turn, are seen to help add depth to money markets and help develop the domestic
capital market. Over time, the implementation of the IRC system will also allow possible adjustments in
reserve requirements in line with international norms.
51
11. Why are interest rates not the same in all banks?
The cost of doing business varies from bank to bank and this is reflected in the different lending
rates charged by the banks.
12. What interest rates are monitored by the BSP?
Interest rates monitored by the BSP include:
• Overnight Lending Facility (OLF) Rate ‐ the interest rate on the standing overnight lending (i.e.
Repurchase) facility at which the BSP lends reserves to commercial banks.
• Overnight Deposit Facility (ODF) Rate ‐ the interest rate on the overnight/term deposit (i.e. Special
Deposit Account) facilities at which the BSP takes deposits from commercial banks.
• Term Deposit Facility (TDF) Rate ‐ the interest rate on the term deposit (i.e. 7‐day and 28‐days
term deposits auctioned using variable‐rate with multiple price tenders) facilities at which the BSP
takes deposits from commercial banks.
• Overnight Reverse Repurchase (RRP) Facility Rate – the interest rate on the RRP facility at which
overnight RRP agreements are offered to banks. The offering involves a fixedrate and full‐
allotment method where individual bidders are awarded a portion of the total offer depending on
their bid size.
• Treasury bill (T‐bill) Rate ‐ the rate on short‐term debt instruments issued by the NG for the
purpose of generating funds needed to finance outstanding obligations. T‐bills come in maturities
of 91, 182 and 364 days. Auction is usually held on Mondays at the Bureau of the Treasury.
• Interbank Call Loan Rate ‐ the rate on loans among banks for periods not exceeding 24 hours
primarily for the purpose of covering reserve deficiencies.
• Philippine Interbank Offered Rate (PHIBOR) ‐ represents the simple average of the interest rate
offers submitted by participating banks on a daily basis, under the auspices of the BAP. The
participants consist of 20 local and foreign banks, which post their bid and offer rates between
10:30 – 11:30 A.M. on an electronic monitor where lending rates in pesos are determined. The
rates given by the banks are used as their dealing rates or the rates at which they will be able to
borrow from or lend to the market during the day. Launched by the BAP on 1 February 1996,
PHIBOR serves as an indicator of the banking system’s level of liquidity.2
• Philippine Interbank Reference Rate (PHIREF) ‐ the implied interest rate on the peso derived from
all done USD/PHP swap and forward transactions. The rate is a firm price, not an indicative quote,
transacted among financial institutions. The PHIREF rate is estimated through a “fixing”
arrangement wherein an average rate is calculated from rates contributed by a panel of banks.
• PHP BVAL Reference Rates‐ are benchmark rates for the Philippine peso in the GS market. The
PHP BVAL Reference Rates are calculated by Bloomberg Finance Singapore L.P. and/or its
affiliates in an agreement with the BAP.3
• Time Deposit Rate ‐ the weighted average interest rate charged on interest‐bearing deposits with
fixed‐maturity dates and evidenced by certificates issued by banks.
• Savings Deposit Rate ‐ the rate charged on all interest‐bearing deposits of banks, which can be
withdrawn anytime. It is derived as the ratio of interest expense on peso deposits of sample banks
to the total outstanding level of these deposits.
52
• Bank Average Lending Rate ‐ the weighted average interest rate charged by commercial banks on
loans granted during a given period of time. Monthly data are computed as the ratio of actual
interest income of sample banks on their peso‐denominated loans to the total outstanding level of
these loans.
• Lending Rate ‐ refers to the range (high and low) of lending rates reported by commercial banks
on a daily basis. The low end refers to the prime lending rate.
13.Why is there a gap between the banks’ savings deposit rate and lending rate?
The gap reflects the interest rates charged on loans, covering not only the cost of funds (marginal
cost), but also intermediation and other overhead costs, as well as the spread or profit margin. The spread
represents the risk premium assigned to a particular loan exposure — the higher the risk, the higher the
spread. It should also be noted that the data on lending rates reflect the average interest rate level and
hence, provide only a broad indication of loan tenors and risk exposures.
In Q4 2019, the interest rates on savings and time deposits (all maturities) averaged 0.989 percent
and 3.128 percent, respectively. Bank lending rates (all maturities), meanwhile, averaged 6.796 percent
during the same period. These translated to a gap ranging 3.668‐5.807 percent between the lending and
deposit rates.
14. What implications do interest rate levels have on the economy?
During normal times, a low‐interest rate environment, which reflects competitive conditions as
well as the actual cost of funds, should impact positively on a bank’s financial performance. Low interest
rates encourage borrowing to finance economic activity. This speeds up economic growth, improving the
borrowers’ ability to repay loans, which, in turn, should affect favorably the bank’s earnings. Thus, banks
gain from low interest rates in two ways: the increased demand for bank loans, and the reduction in non‐
performing loans. The stock market similarly prospers due to prospects of high corporate profits.
The experience of many countries shows that high interest rates tend to reduce borrowing for
investment activity, ultimately leading to slower economic growth. Slower economic growth, in turn,
reduces corporate profits and, hence, the ability to repay loans, which impacts negatively on banks’
balance sheets. High interest rates also tend to encourage investors to pull out their funds from the stock
market and invest them instead in fixed‐income securities. An emerging economy that is expected to grow
robustly will naturally see higher interest rates to temper inflationary pressures
Too low an interest rate can also have serious repercussions. Having very low interest rate for a
long time can lead to sharp and sustained increases in asset prices beyond what can be supported by long‐
term economic fundamentals. Such asset price increases spawn expectations of higher short‐term trading
profits more than the assets’ future earning capacity. There is also the so called zero lower bound, that is,
nominal interest rate cannot go below zero. A zero nominal interest rate would mean that the real interest
is negative, which is a mirror image of too low aggregate demand. With negative real rates, households
will opt not to deposit their cash in the banks because the real return is eroded. Investors will also postpone
planned investment because returns are negative. Hence, economic activity is stalled and recession sets
in. Under this scenario, interest rates are of no help to the economy.
53
15. How would you describe interest rate developments since the mid‐1990s?
T‐bill rates have generally been declining since mid‐1998 (Table 1 and Chart 1). The decline in
yields continued until it reached its lowest in 2002, when rates began to inch up anew until 2004. T‐bill
rates eased in 2005 and 2006, reflecting decelerating inflation, improving fiscal performance, and ample
liquidity in the financial system. In addition, average lending rates mirrored the movement in the yields
of government securities. This decline in interest rates was accompanied by a flattening of the yield curve,
which suggests an easing in monetary conditions and relatively well‐contained inflation expectations. The
downtrend in T‐bill rates continued until April 2007. However, beginning May, T‐bill rates began to rise
on account of the uncertainty brought about by the local elections. Rates continued to increase gradually
until September due to worries over the impact of the US subprime mortgage market troubles on local
markets, despite continued benign inflation. In December, average domestic interest rates eased following
the Government’s announcement of a record‐budget surplus in November. These rates remained low
compared to year‐ago levels but were higher relative to the rates posted at the start of 2007.
In 2008, T‐bill rates trekked a general uptrend as a result of higher inflation due mainly to rising
commodity prices and later in the year, due to the higher risk premium demanded by the market players
in reaction to the global financial turmoil. Beginning 2009, short‐term interest rates started to ease
following the six rate cuts in the BSP’s key policy rates since December 2008. In 2010 and 2011 primary
interest rates declined further as a result of the BSP’s previous monetary policy decisions.
In 2012, domestic interest rates in the primary market started to increase on the back of cautious
market sentiment amid the continuing debt crisis in the euro area. The rising T‐bill rates also reflected
investors’ preference for longer‐dated government papers given expectations of a manageable inflation
outlook over the policy horizon. In 2013, domestic interest rates in the primary market declined
significantly due to strong demand for ample liquidity in the financial system.
In 2014, the average T‐bill rates in the primary market edged higher as investors sought higher
yields on expectations of an increase in interest rates as the US Federal Reserve’s monthly bond‐buying
program ended in October 2014. In 2015, Treasury bill rates in the primary market rose across tenors even
as domestic inflation remained subdued throughout the year. In 2016, T‐bill rates declined reflecting
strong investor preference for short‐dated tenors amid concerns over slowing economic growth in Asia
and the continued expectation
of a US Fed rate hike in the coming months. In 2017, T‐bills increased due to geopolitical concerns
overseas andheightened uncertainty on the direction of US fiscal and monetary policy. In 2018, T‐bill
rates further increased as a result of policy rate hikes by the BSP and the US Federal Reserve.
The average interest rates for the 91‐, 182‐ and 364‐day T‐bills in the primary market in Q1 2020
rose to 3.161 percent, 3.459 percent, and 3.793 percent from 3.118 percent, 3.229 percent, and 3.528
percent, respectively, in the previous quarter. The results of the auctions reflected market players’ risk
aversion amid geopolitical tensions between the US and Iran as well as concerns over the impact of Taal
Volcano’s eruption during the early part of the quarter. However, a declining trend was seen mid‐part of
the quarter following the 75‐basis point cumulative policy rate cut by the BSP and due to increased demand
for short‐term government securities amid uncertainties and lingering concerns over the COVID‐19
outbreak.
54
ROLE OF IMF IN CENTRAL BANKING
A key role of central banks is to conduct monetary policy to achieve price stability (low and stable
inflation) and to help manage economic fluctuations. The policy frameworks within which central banks
operate have been subject to major changes over recent decades.
Since the late 1980s, inflation targeting has emerged as the leading framework for monetary policy.
Central banks in Canada, the euro area, the United Kingdom, New Zealand, and elsewhere have introduced
an explicit inflation target. Many low-income countries are also making a transition from targeting a
monetary aggregate (a measure of the volume of money in circulation) to an inflation targeting framework.
Central banks conduct monetary policy by adjusting the supply of money, generally through open
market operations. For instance, a central bank may reduce the amount of money by selling government
bonds under a “sale and repurchase” agreement, thereby taking in money from commercial
banks. The purpose of such open market operations is to steer short-term interest rates, which in turn
influence longer-term rates and overall economic activity. In many countries, especially low-income
countries, the monetary transmission mechanism is not as effective as it is in advanced economies. Before
moving from monetary to inflation targeting, countries should develop a framework to enable the central
bank to target short-term interest rates (paper).
Following the global financial crisis, central banks in advanced economies eased monetary policy
by reducing interest rates until short-term rates came close to zero, which limited the option to cut policy
rates further (i.e., limited conventional monetary options). With the danger of deflation rising, central
banks undertook unconventional monetary policies, including buying long-term bonds (especially in the
United States, the United Kingdom, the euro area, and Japan) with the aim of further lowering long term
rates and loosening monetary conditions (paper). Some central banks even took short-term rates below
zero.
Foreign exchange regimes and policies
The choice of a monetary framework is closely linked to the choice of an exchange rate regime. A country
that has a fixed exchange rate will have limited scope for an independent monetary policy compared with
one that has a more flexible exchange rate. Although some countries do not fix the exchange rate, they
still try to manage its level, which could involve a tradeoff with the objective of price stability. A fully
flexible exchange rate regime supports an effective inflation targeting framework.
Macroprudential policy
The global financial crisis showed that countries need to contain risks to the financial system as a
whole with dedicated financial policies. Many central banks that also have a mandate to promote financial
stability have upgraded their financial stability functions, including by establishing macroprudential
policy frameworks. Macroprudential policy needs a strong institutional foundation to work effectively.
Central banks are well placed to conduct macroprudential policy because they have the capacity to analyze
systemic risk. In addition, they are often relatively independent and autonomous. In many countries,
legislators have assigned the macroprudential mandate to the central bank or to a dedicated committee
within the central bank. Regardless of the model used to implement macroprudential policy, the
institutional setup should be strong enough to counter opposition from the financial industry and political
pressures and to establish the legitimacy and accountability of macroprudential policy. It needs to ensure
55
that policymakers are given clear objectives and the necessary legal powers, and to foster cooperation on
the part of other supervisory and regulatory agencies (see further Key Aspects of Macroprudential Policy).
A dedicated policy process and is needed to operationalize this new policy function, by mapping an
analysis of systemic vulnerabilities into macroprudential policy action (Staff Guidance Note on
Macroprudential Policy).
How the IMF supports effective central bank frameworks
The IMF promotes effective central bank frameworks through multilateral surveillance, policy
papers and research, bilateral dialogue with its member countries, and the collection of data for policy
analysis and research.
Multilateral surveillance, policy analysis and research can help improve global outcomes:
• The IMF has provided policy advice on how to avoid potential side effects from the implementation of
and exit from unconventional monetary policy (paper), and established principles for evolving monetary
policy regimes in low income countries (paper).
• The Fund has also examined interactions between monetary and macroprudential policy (paper), and
provided principles for the establishment of well-functioning macroprudential frameworks (guidance
note).
The IMF is in regular dialogue with member country central banks through bilateral surveillance (Article
IV consultation), FSAPs and technical assistance:
• In its Article IV consultations, the IMF provides advice on monetary policy action to achieve low and
stable inflation, as well as on establishing effective monetary policy and macroprudential policy
frameworks.
• The Financial Sector Assessment Program (FSAP) provides member countries with an evaluation of their
financial systems and in-depth advice on policy frameworks to contain and manage financial stability
risks, including the macroprudential policy framework, which is now often covered in dedicated technical
notes (see for example Finland, Netherlands, and Romania).
• Country programs supported by an IMF arrangement often include measures to strengthen monetary
policy and central bank governance.
• Technical assistance helps countries develop more effective institutions, legal frameworks, and
capacity. Topics include monetary policy frameworks, exchange rate regimes, moving from targeting a
monetary aggregate to inflation targeting, improving central bank operations (such as open market
operations and foreign exchange management), and macroprudential policy implementation.
In order to inform policy development and research, the IMF is also engaged with its members to develop
and maintain databases:
• The IMF has for some time kept track of countries’ monetary policy arrangements (AREAER), as well as
central banks’ legal frameworks (CBLD), and their monetary operations and instruments (MOID).
56
• The IMF has recently launched a new annual survey of macroprudential measures and institutions. This
survey will support IMF advice and policymakers around the world, by providing details on the design of
macroprudential measures, and enabling comparisons across countries and over time
• The IMF also compiled a comprehensive historical database of macroprudential measures (iMaPP) that
integrates the latest survey information and allows for an assessment of the quantitative effects of
macroprudential instruments (paper). This database is now being used by IMF economists to measure
policy effects, and it is also available to researchers around the world.
FINANCIAL CONSUMER PROTECTION ADVISORIES
Mandate. In line with the Bangko Sentral ng Pilipinas’ (BSP) consumer protection and financial
literacy advocacy, Governor Amando M. Tetangco, Jr. issued Office Order No. 892 on
16 October 2006 that created the Consumer Affairs Unit (CAU) of the Supervision and
Examination Sector (SES).
It was renamed to Financial Consumer Affairs Group (FCAG) by virtue of Sector Order No. 02
Series of 2008 effective 24 January 2008, pursuant to Monetary Board Resolution No. 1443 dated 13
December 2007.
On 16 October 2014, the Monetary Board, under its Resolution No. 1677, approved, among others, the
reorganization of FCAG to the Financial Consumer Protection Department (FCPD), with revised
functions.
Mission
FCPD empowers a financial consumer by:
1.Creating an enabling environment and defining safety nets where consumer rights are recognized and
protected;
2. Enforcing consumer protection regulations and standards of conduct by BSFIs through an assessment
of compliance with Financial Consumer Protection Framework in order to achieve a culture of fair
dealings and responsible business practices embedded in a BSFI’s operations;
3. Delivering a well-rounded financial education program with long-term goal of creating behavioral
change to our targeted constituencies for the improvement of their financial well-being; and
4. Institutionalizing redress mechanism where consumers have avenues for effective and efficient
redress when they feel they are unjustly treated.
57
FCPD’s Core Functions
Financial Education
Market Conduct Regulations
Policy Initiation
Consumer Assistance
How To Save on Bank Fees and Charges
Understanding bank fees and charges on deposit are key steps to making the most of your account.
If you fail to understand the same, chances are that bank fees and charges are reducing your returns. In
order to save on various fees, we suggest that you read the fine prints in the deposit literature and pay
closer attention to the following relevant terms and conditions:
● Service fees
● Minimum maintaining balance
● Dormancy fee
● ATM transaction fee
● Fee for checks written against insufficient fund
● Interbranch transaction fee
MIND THE SERVICE FEES
Be aware of the different maintenance and transaction fees that banks charge their depositing
clients. Some of these fees are service fee for deposits falling below the minimum Average Daily Balance
(ADB), dormancy fee, service charge for excess withdrawal, service fee for closing the account within a
specified period of time from its opening, ATM transaction fee, overdraft charges, interbranch transaction
fee, and others. Awareness of such service fees will help you better manage your deposit account and save
on bank fees.
BE WATCHFUL OF YOUR MAINTAINING BALANCE
Be aware of the required minimum maintaining balance for your account and keep your deposit
balance within such maintaining balance. Bank charges/fees for falling below the ADB are computed at
the end of each month. In addition, you may also want to take note of the required minimum balance to
earn interest, as this may be different from the required minimum maintaining balance.
58
DEFEND DEPOSITS FROM DORMANCY
Make sure that you update your deposit account regularly. Under BSP regulations, if a
savings/current deposit account is left “sleeping” with no transactions (deposits or withdrawals) for a
period of two (2) years/ one (1) year, it becomes dormant and is subject to dormancy fee. To keep your
account active and to avoid this fee, make it a habit to regularly make deposits even in small amounts.
However, if this is not possible, it is best to just close the deposit account before the dormancy sets in, no
matter how small or big your deposit balance. By this way, you will not to lose your hard-earned money
to dormancy fees.
PATRONIZE YOUR OWN
For free ATM transactions, make sure to use your own bank’s ATMs. You may refer to the bank’s
website for a list of its ATM locations. If this is not possible, choose the ATM network with the lowest
ATM transaction fee.
BRING UP TO DATE YOUR CHECKBOOK
If you maintain a checking account, balance your account as often as you make transactions (e.g.
deposit, withdrawals, issuance of checks). It is very important to know how much money you have in your
account at all times in order not to “bounce checks”. Typical fees for a check written against insufficient
funds range from P1,000.00 to P2,000.00. Think of how much you can possibly save if you make sure
that the checks you issued are always funded.
WHAT IS FRAUD?
- is an act, expression, omission or concealment that deceives another to the fraudster’s advantage.
WHAT IS SCAM?
- is a fraudulent business schemes to mislead, swindle, victimize a person or persons with the goal of
financial gain.
Common Types of fraud and scam
1. TEXT SCAM – fraudulent text messages stating that your mobile phone number won in a raffle contest
either by a government institution or popular game show.
2. CREDIT CARD AND ATM SKIMMING – is an illegal copying of information from the magnetic strip
of the credit card or ATM through a skimming device.
3. PONZI SCHEME AND PYRAMID SCHEME - are types of securities fraud where existing investors
are paid by the contributions of new investors.
4. SPURIOUS INVESTMENTS - fraudulent commercial documents being sold or traded by individuals

or companies and are allegedly issued, secured or guaranteed by the BSP or International Banks.
59
5. IDENTITY THEFT - fraudsters get the personal information they need to assume your identity through
theft.
5. IDENTITY THEFT - fraudsters get the personal information they need to assume your identity through
theft.
7. SPOOFING - A website that appears to be legitimate but it is actually created by a fraudster.
8. NIGERIAN SCAMS – these strangers will tell you that they have either large sums of money for
remittance or a very good business offer and they need your account to bring the money to the country.
9. BUDOL-BUDOL SCAM - Scammer will be shown bundles of cash to get the victim’s trust and then
the scammer will ask for cellphone or other important things in exchange for the fake money.
10. DUGO-DUGO SCAM -Victim receives a call from someone that a loved one has been kidnapped or
has been hurt.

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1

Monetary Policy and Central Banking

OVERVIEW OF MONEY AND ITS FUNCTIONS

Demand for Money

What is Velocity of Money?

Factors affecting velocity

Method and habit of payment

Degree of regularity of income receipt

Distribution of National Income

Development of Banking Sector

Speed in transportation of money

Time unit of Income receipts (daily/Weekly/monthly)

Fractional Reserve Banking System

Long before the Spaniards came to the

The Philippines is naturally rich in gold. It

The Spanish dos mundos were circulated

Due to the shortage of fractional coins, the

General Emilio Aguinaldo, the first Philippine

With the coming of the Americans

The coins issued under the system

The Japanese Occupation

The outbreak of World War II

The Philippine Republic

With the establishment of the Central Bank of the

A new wave of change swept through the

Gold Coin Standard

Gold Bullion Standard

Gold/ Exchange Standard

Inconvertible paper/ Paper currency Standard

MONETARY SYSTEM DURING COLONIAL REGIMES

THE BANGKO SENTRAL NG PILIPINAS

Chronology of Events: Central Banking in the Philippines

1946 A joint Philippine-American Finance Commission was created to study the

PD No. 72 emphasized the maintenance of domestic and international

OVERVIEW OF FUNCTIONS AND OPERATIONS

THE MONETARY BOARD

In the exercise of its authority, the Monetary Board shall:

The BSP Monetary Board

THE PHILIPPINE FINANCIAL SYSTEM

Elements of the Financial System

Investors and Borrowers

Components of the Philippine Financial System

2. Non Bank Financial Institutions

Government Non Bank Financial Institutions

REGULATION AND SUPERVISION OF FINANCIAL INSTITUTIONS

PHILIPPINE MONETARY POLICY

Other monetary policy instruments include:

• encouraging/discouraging deposits under the term deposit auction facility (TDF);

1. Reverse repurchase facility

2. Acceptance of term deposits

3. Standing liquidity facilities

BSP’s Alternative Measures of Core Inflation:

o Weighted Median - represents the middle inflation (corresponding to a cumulative CPI

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

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

Quasi-money – the sum of savings and time deposits

THE BSP AND PRICE STABILITY

Why do we want price stability?

MONETARY POLICY AND ITS CURRENT FRAMEWORK

• increasing/decreasing the reserve requirement;

2. What is the basic approach to monetary policy in the Philippines?

THE SHIFT TO INFLATION TARGETING