4. THE ROLE OF THE BSP IN THE Economy PDF

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FIN 3153THE ROLE OF THE BSP IN THE ECONOMYBSP’s Mandate  Section 3, RA No. 7653 (New Central Bank Act)  As amended by RA No. 11211  Mandate: o “.. objective is to maintain price stability conducive to a balanced and sustainable growth of the economy and employment” o “.. promote financial stabili...

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FIN 3153 THE ROLE OF THE BSP IN THE ECONOMY BSP’s Mandate  Section 3, RA No. 7653 (New Central Bank Act)  As amended by RA No. 11211  Mandate: o “…primary objective is to maintain price stability conducive to a balanced and sustainable growth of the economy and employment” o “…shall promote financial stability…” o “… shall oversee the payment and settlement systems in the Philippines… in order to promote sound and prudent practices consistent with the maintenance of the financial stability” o “…shall promote broad and convenient access to high quality financial services and consider the interest of the general public Three Pillars of Central Banking 1. Price Stability  Through the CONDUCT OF MONETARY POLICY  Price Stability o On average, prices neither increase nor decrease markedly o Price changes are NEGLIGIBLE over time o Low and stable inflation  Inflation o Rate of Change in Overall Price Level o Sustained increase in the average prices of goods and services typically purchased by consumers o Measured as the annual percentage change in the Consumer Price Index (CPI) o Causes - Changes in price level result from interaction of supply and demand - Prices INCREASE when demand > supply - Prices DECREASE when demand < supply a. Cost-Push - Due to increase in cost of production and other supply factors - OUTSIDE the influence of the BSP b. Demand-Pull - Due to excess demand relative to supply of goods - E.g., increase in money supply - BSP exerts INFLUENCE over money supply, and thus, can also influence inflation  Consumer Price Index (CPI) o How price changes are measured o Represents the average price of a standard basket of goods and services consumed by a typical Filipino family for a given period  Importance o Preserves purchasing power o Increases certainty in decision making  Monetary Policy o Actions by central bank to manage the availability and cost of money and credit to influence the overall demand for goods and services and ultimately attain stable prices o Includes: policy interest rates (on overnight reverse repurchase, overnight lending, and overnight deposit facilities), reserve requirement, auction size for term deposit facility, and rediscounting rate a. Contractionary Monetary Policy - LESS money, HIGHER interest rate - LESS spending - SLOWER GROWTH in demand - LOWER inflation b. Expansionary Monetary Policy

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- MORE money, LOWER interest rate - MORE spending - HIGHER GROWTH in demand - HIGHER inflation Inflation Targeting o Publicly announcing an inflation target which the BSP promises to achieve over a certain period

2. Financial Stability  Operations of banks and other financial institutions are sound and stable while remaining supportive of the country’s economic growth  Overview of the Philippine Financial System

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How does the BSP supervise and regulate financial institutions?

3. Efficient Payments and Settlement System  Includes institutional and infrastructure arrangements and processes through which money is transferred from one party to another  Provides channels through which funds are transferred to discharge payment obligations arising from economic and financial transactions  How does the BSP take lead in promoting an efficient payments and settlement system? o Establish policy and regulatory network – also known as the National Retail Payment System (NRPS) – to establish safe, efficient, and reliable retail payment system o Provide necessary infrastructure through the operations of the country’s real time gross settlement system – also known as PhilPaSS Other Key BSP Functions  Issuer of money...