Transcript monetary policy

BSP MONETARY POLICIES
MONETARY POLICIES
• measures or actions taken by the central bank
to regulate money supply in the economy
• aimed at influencing the timing, cost and
availability of money and credit as well as
other financial factors, for the purpose of
stabilizing the price level
BSP specifically adopted a low and stable
inflation rate as the ultimate target of
monetary policy.
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.
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
• INFLATION TARGETING
- Adopted by BSP on January 2002
- Inflation target serves as a nominal anchor,
aimed at coordinating inflationary
expectations
- Entails the announcement of an explicit
nominal inflation target which the central
bank commits to achieve over a given period
of time
- Inflation target is set by the government
and the BSP
• The government’s inflation target is defined in
terms of the average year-on-year change in
the consumer price index (CPI) over the
calendar year.
• The inflation targets have been set at 4.5
percent with a tolerance interval of + 1.0
percentage point for 2010 and 4.0 percent
with a tolerance interval of + 1.0 percentage
point for 2011.
Inflation Report
The Inflation Report is published quarterly
as part of the BSP's transparency
mechanism under inflation targeting and
to convey to the public the overall
thinking and analysis behind the BSP's
decision on monetary policy.
Open Letter to the President
To ensure accountability in cases where the BSP
fails to achieve the inflation target, the BSP
Governor issues an Open Letter to the President
outlining the reasons why actual inflation did not
fall within the target, along with the steps that
will be taken to bring inflation towards the target.
Open Letters to the President have been issued
on 16 January 2004, 18 January 2005, 25 January
2006, 19 January 2007, 14 January 2008 and 26
January 2009.
• OPEN MARKET OPERATIONS
- Transactions involve the sale or purchase
of securities by the BSP to withdraw liquidity
from or inject liquidity into the system
- Key component of monetary policy
implementation consist of repurchase and
reverse repurchase transactions, outright
transactions, and foreign exchange swaps.
A.Repurchase (RP) and Reverse Repurchase (RRP)
- transactions are carried out through the
repurchase (RP) facility and the reverse
repurchase (RRP) facility of the BSP.
A.1 In a repurchase or repo transaction, the BSP
buys government securities from a bank with a
commitment to sell it back at a specified future
date at a predetermined rate. The BSP’s payment
to the bank increases the latter’s reserve
balances and has an expansionary effect on
liquidity.
A.2 In a reverse repo, the BSP acts as the
seller of government securities and the bank’s
payment has a contractionary effect on
liquidity.
A.3 RP and RRP transactions have maturities
ranging from overnight as well as two weeks
to one month. The interest rates for the
overnight RRP and RP facilities signal the
monetary policy stance and serve as the BSP’s
primary monetary policy instruments.
B. Outright transactions refer to the direct
purchase/sale by the BSP of its holdings of
government securities from/to banking
institutions.
In an outright transaction, the parties do not
commit to reverse the transaction in the future,
creating a more permanent effect on money
supply. The transactions are conducted using the
BSP’s holdings of government securities. When
the BSP buys securities, it pays for them by
directly crediting its counterparty’s Demand
Deposit Account with the BSP.
The transaction thus increases the buyer’s
holdings of central bank reserves and expands
the money supply.
Conversely, when the BSP sells securities, the
buyer’s payment (made by direct debit against
his Demand Deposit Account with the BSP)
causes the money supply to contract.
C. Foreign exchange swaps refer to
transactions involving the actual exchange of
two currencies (principal amount only) on a
specific date at a rate agreed on the deal date
(the first leg), and a reverse exchange of the
same two currencies at a date further in the
future (the second leg) at a rate (different
from the rate applied to the first leg) agreed
on deal date.
• Acceptance of fixed-term deposits
The BSP also accepts deposits from banks. The
Special Deposit Accounts (SDA) facility
consists of fixed-term deposits by banks and
by trust entities of banks and non-bank
financial institutions with the BSP. It was
introduced in November 1998 to enable the
BSP to expand its toolkit in liquidity
management.
In April 2007, the BSP expanded access to the
SDA facility by allowing trust entities to
deposit in the SDA facility in order to better
manage liquidity in the face of strong foreign
exchange inflows.
• Standing Facilities
C.1 The BSP extends discounts, loans and
advances to banking institutions in order to
influence the volume of credit in the financial
system.
Rediscounting is a standing credit facility
provided by the BSP to help banks meet
temporary liquidity needs by refinancing the
loans they extend to their clients. 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.
There are two types of rediscounting facilities
available to qualified banks: the peso
rediscounting facility and the Exporters’ Dollar
and Yen Rediscount Facility (EDYRF) which was
introduced in 1995.
• Reserve Requirements
Reserve requirements refer to the percentage
of bank deposits and deposit substitute
liabilities that banks must keep on hand or in
deposits with the BSP and therefore may not
lend.
Changes in reserve requirements have a
significant effect on money supply in the
banking system, making them a powerful
means of liquidity management.
Reserve requirements apply to peso demand,
savings, time deposit and deposit substitutes
(including long-term non-negotiable taxexempt certificates of time deposit or
LTNCTDs) of universal banks (UBs) and
commercial banks (KBs) and may be kept in
the form of cash in vault, deposits with the
BSP and government securities.
Required reserves consist of two forms:
regular or statutory reserves; and liquidity
reserves.
Deposits maintained by banks with the BSP up
to 40 percent of the regular reserve
requirement are paid interest at 4 percent per
annum, while liquidity reserves are paid the
rate on comparable government securities less
half a percentage point.
The use of liquidity reserves help to reduce
bank intermediation costs since they are paid
market-based interest rates.
In March 2006, the Monetary Board began to
require banks to keep liquidity reserves in the
form of term deposits in the reserve deposit
account (RDA) with the BSP instead of
government securities bought directly from
the BSP.
MONETARY POLICY DECISIONS
28 January, 11 March, 22 April, 3 June, 26 August,
18 November
The Monetary Board decided to keep the BSP’s key
policy interest rates steady at 4 percent for the
overnight borrowing or reverse repurchase (RRP)
facility and 6 percent for the overnight lending or
repurchase (RP) facility. The interest rates on
term RRPs, RPs, and special deposit accounts
(SDAs) were also left unchanged.
• MORAL SUASION
BSP uses moral suasion to influence the
behaviour of the banking system.
BSP does this by holding frequent and regular
dialogues with bankers and other financial
market players in order to inform them of the
policy actions of BSP and the reason for these
actions as well as influence them to respond
positively to these policy directions.