Monetary Policy and

Central Banking in
the Philippines
Bangko Sentral ng Pilipinas (BSP)
The central monetary
authority that shall function
and operate as an
independent and accountable
body corporate in the
discharge of its mandated
responsibilities concerning
money, banking and credit.
BSP Organizational Chart
BSP Organizational Chart
• Financial Supervision Sector (FSS) – 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
• Monetary and Economics Sector (MES) – mainly responsible for the
operations/activities related to monetary policy formulation,
implementation, and assessment
• Corporate Services Sector (CSS) – mainly responsible for the effective
management of corporate strategy and communications, as well as the
BSP’s human, financial, technological, and physical resources to support
the BSP’s core functions
Monetary Policy
Monetary Policy
These are 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.
Monetary Policy Objective
The primary objective of BSP's monetary policy is to
promote a low and stable inflation conducive to a
balanced and sustainable economic growth. The
adoption of inflation targeting framework for monetary
policy in January 2002 is aimed at achieving this
objective.
2 types 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.
• 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.
Interest Rate Corridor
On 3 June 2016, the BSP formally adopted an interest rate corridor
(IRC) system as a framework for conducting its monetary operations.

The IRC is a system for guiding short-term market rates towards the BSP
policy interest rate which is the overnight reverse repurchase (RRP)
rate.  It consists of a rate at which the central bank (CB) lends to banks
(typically an overnight lending rate) and a rate at which it takes
deposits from them (deposit rate).
Interest Rate Corridor
In a standard corridor, the
lending rate will be above
the CB target/policy rate
(thereby forming an upper
bound for short-term
market rates), and the
deposit rate will be below
the CB policy rate (thereby
forming the lower bound).
Monetary Policy Instruments
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.
Reverse
Repurchase/Repurchase
transactions
In a repurchase transaction, the BSP buys government securities (GS)
from a bank with a commitment to sell them back at a specified future
date at a predetermined rate, resulting in an expansionary effect on
liquidity.

Conversely, in a reverse repurchase (RRP) operation, the BSP also acts

as the seller of GS and the bank’s payment to the BSP has a
contractionary effect on liquidity.
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;
Monetary Policy Instruments
(d) increasing/decreasing its rediscount rate on loans extended to
banking institutions on a short-term basis against eligible collaterals of
banks’ borrowers;
(e) outright sales/purchases of the BSP’s holdings of government
securities.
Raising/reducing the BSP's
policy interest rates
• Interest Rate: the cost of borrowing money or the amount paid for
lending money expressed as a percentage of the principal.

• Expansionary: Reduce interest rates

• Contractionary: Raise interest rates
Reserve Requirement
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.
• Expansionary: Reduce reserve requirement
• Contractionary: Raise reserve requirement
Reserve Requirement
ODF and TDF
• Overnight Deposit Facility
The existing reverse repurchase (RRP) facility is an overnight facility and
will be 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 table below presents the features of the O/N RRP facility.
Term Deposit Facility
• The TDF is a key liquidity absorption facility, commonly used by
Commercial Banks (CBs) for liquidity management. Due to the BSP’s
inability to issue its own debt instruments except in cases of
extraordinary movement in price levels under R.A. 7653, the TDF is
tasked to withdraw a large part of the structural liquidity surplus
from the financial system to bring market rates closer to the BSP
policy rate.
Term Deposit Facility
ODF and TDF
• Expansionary: discouraging deposits in the overnight deposit facilities
(ODF) and term deposit facilities (TDF) by banks
• Contractionary: encouraging deposits in the overnight deposit
facilities (ODF) and term deposit facilities (TDF) by banks
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.
Rediscounting
• Rediscounting is a privilege of qualified banks that have approved and
active rediscounting line with the Bangko Sentral ng Pilipinas (BSP) to
obtain loans or advances from BSP using the eligible papers of its end-
user borrowers as collaterals. It is a standing credit facility to help
banks meet temporary liquidity needs by refinancing the loans they
extend to their clients.
Rediscounting
• A bank extends loans to end-user borrowers who execute credit
instruments [i.e., promissory notes (PNs), drafts or bills of exchange
(BX)] in favor of the bank. The bank rediscounts the credit
instruments of its end-user borrowers by endorsing the same in favor
of the BSP. The BSP, in turn, lends the bank an amount equivalent to a
certain percentage of the face amount/outstanding balance of the
end-user borrower’s credit instrument.
Rediscounting
• The BSP uses its rediscount facility as an instrument to influence the
volume of credit in the financial system and to act as the 1) short-
term safety valve for the banking system when the aggregate supply
for reserves fall short of demand; or 2) when banking institutions
meet an unexpected shortage of reserves or funding for their
temporary liquidity needs.

• The rediscounting facility has two categories namely, Peso Rediscount

Facility and Exporters Dollar and Yen Rediscount Facility (EDYRF).
Rediscount Rate
• The interest rate charged by BSP on the rediscounting loan is called
the rediscount rate.

• Expansionary: decreasing its rediscount rate on loans extended to

banking institutions on a short-term basis against eligible collaterals of
banks’ borrowers;
• Contractionary: increasing its rediscount rate on loans extended to
banking institutions on a short-term basis against eligible collaterals of
banks’ borrowers;
Outright sales/purchases of the
BSP’s holdings of government
securities
• An outright contract involves direct purchase/sale of government
securities by the BSP from/to the market for the purpose of
increasing/decreasing money supply on a more permanent basis. In
such a transaction, the parties do not commit to reverse the
transaction in the future, creating a more permanent effect on the
banking system’s level of money supply.

• Expansionary: Purchase of government securities

• Contractionary: Sale of government securities
Sources:
• http://www.bsp.gov.ph/downloads/Publications/FAQs/rediscounting.
pdf
• http://www.bsp.gov.ph/downloads/regs/New_Central_Bank_Act.pdf
• http://www.bsp.gov.ph/monetary/glossary.asp
• http://www.bsp.gov.ph/moperations/moperations.asp