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Figure 6 shows the Inflation Targeting: Process Flowchart, starting with the
announcement of the inflation target by the BSP in coordination with the government.
Then the BSP generates inflation forecasts using as wide a set of information as possible.
The forecast is then compared with the inflation target; the BSP will have to adjust its
policy instrument the overnight Reverse Repurchase and Repurchase rates so that the
inflation target would hit the inflation target. On a regular basis, the BSP will provide
reports explaining its policy decisions and the assessments of the inflation environment
and outlook. In case of a breach of the inflation target, the BSP will have to explain to the
public the reason behind such breach. The BSP will also have to formulate policy with
the view to steering inflation toward the target.
Throughout the implementation of the inflation targeting framework, thus it gives
further consistency and transparency of monetary policy and providing a clearer
framework for assessing the impact of domestic and external influences on inflation
outlook.
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2. Decreased GDP and GNP
The growth of the economy is evidently slowing down with the decreased GDP
and GNP on 2008 far from the uptrend in 2005-2008. Thus, the decrease resulted from
increase in inflation by affecting the economic activities.
Relating to the problem, dependence of the economic growth based on the GNP
and GNP as measure of growth from economic activities, inflation targeting set was not
attained as factor in achieving monetary stability in the Philippines. Considering the
decline in both measures the major assumption is that inflation rate accelerates causes
poor contribution to the national output. Hence, actual inflation is higher than the target.
meaning attainment of the target failed.
Figure7. Real GDP and GNP 2002-2008
Source: BSP Annual Report, 2008
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3. Decreasing Real Interest Rate and Increasing Nominal Lending Rate
Real interest rates, interest rates adjusted for the expected erosion of purchasing
power resulting from inflation or nominal interest rates minus the expected rate of
inflation Bank Average Lending Rates and Treasury bill rates have generally been
declining and reached its lowest in 2008 from inch increase in 2007 from negative rates
in 2005 and 2006.
-6
-4
-2
0
2
4
6
8
2000 2001 2002 2003 2004 2005 2006 2007 2008
Real Interest rates (2000-2008)
Manila Ref. Rates (90 days)T-bills 91 daysTime Deposits (all maturities)Bank Ave. Lending Rates (all maturities)
Figure 8. Real Interest Rate (2000-2008)
Source: Figures from Exhibit 1
As shown in figure 8 there is sudden increase of nominal interest rates or bonds
that was not yet adjusted. In 2008 Treasury bill increased meaning that the interest that
will be incurred in a year increases.
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0
2
4
6
8
10
12
14
2000 2001 2002 2003 2004 2005 2006 2007 2008
Nominal Interest Rates (2000-2008)
Manila Ref. Rates (90 days)T-bills 91 daysTime Deposits (all maturities)Bank Ave. Lending Rates (all maturities)
Figure 9.Nominal Interest Rate (2000-2008)
Source: Figures from Exhibit 1
Showing both graph is influenced mainly by increased inflation making it higher
that its target, with the decrease in real interest rate and increase in nominal rate the
economic performance of the Philippines slowdown.
4. Weakening Peso Exchange Rate
A stronger peso connotes better purchasing power, thus keeping it lower value
compare to foreign currency gives more value buying foreign and maintaining inflation
that will impact on contributing higher percent on GNP and GDP and making
international debt payment more ease considering stronger peso.
Exchange rate is a factor in determining the quantity of Exports and Imports of
the country; the higher exchange rate means lower imports and high exports. The exports
and imports are generally a determinant of inflation range. Thus, the exchange rate
affects the inflation targeting of BSP through the exchange rates.
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Figure 10. Peso-dollar exchange rates (2000-2008).Source: BSP 4th Quarter Inflation Report, 2009
Exchange rate and inflation are related through purchasing power parity, inflation
affect the purchasing parity and the results is the changes in exchange rate. In relation to
the problem of not attaining the target inflation rate exchange rate contribute
stabilization of the external sector of the economy leading to sustained economic
activities beneficial in maintaining inflation.
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ALTERNATIVE COURSES OF ACTION
1. Maintain Strong Peso Foreign Exchange Rate
In maintaining strong foreign exchange rate of the peso and its convertibility into
other freely convertible currencies, BSP as a monetary regulator of the Philippines can
engage in foreign exchange transactions with banking institution operating in the
Philippines, the government, its political subdivisions and instrumentalities, foreign or
international financial institution and foreign government and their instrumentalities. This
transaction includes borrowing from foreign banks and other foreign international
entities. The effect of foreign exchange to inflation is that in the government point of
view the lower the equivalent of 1 US Dollar for example means a better performance of
the country in the money supply side. Foreign exchange rates dictate the flow of export
and imports which affects the Gross Domestic Product. The higher rate of foreign
exchange means greater cost to the country in importing and greater profits in exporting.
In times of high foreign exchange rate country tends to increase its exports to earn profits
indicating balanced and sustainable economy triggering down the increase in inflation
toward achieving its desired inflation target.
Advantages:
can maintain international stability
can maintain convertibility of peso
promote the domestic investment of bank resources
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Disadvantages:
Borrowing from international entities pledge any gold or other assets which
serve as the collateral for the loans engage from foreign entities
International transact can cause fall in international reserve due to payments
or remittances abroad
2. Reassess Inflation Targeting Process
The BSP has a number of monetary policy instruments at its disposal to promote
price stability. To increase or reduce liquidity in the financial system, the BSP uses open
market operations, accepts fixed-term deposits, offers standing facilities and requires
banking institutions to hold reserves on deposits and deposit substitutes. Upon using the
inflation targeting framework which is not seems to hit by the actual inflation. Due to this
situation, the trainees suggest to reassess the inflation targeting process on the part used
by the BSP on not attaining the target inflation. Stated on the flowchart upon not
attainment of the target was the usage of Adjust Policy Interest Rate and Government
Rethinks Inflation Target. These two alternatives seem not to solve the problem on not
attaining the target inflation.
The trainees suggest the BSP together with the government to reassess the
solutions on how to attain the target inflation. Starting from the evaluation of the
effectiveness of the monetary instruments used to hinder inflationary pressures.
Additional actions or study upon not meeting the target and how to meet the target is
advised.
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Advantages:
May attain the desired inflation target through reassessment
May stabilize the price through reviewed policy
Provides other solution to the problem by creating a better understanding and
development process of hitting the target inflation.
May attain BSPs goals and objective and economic sustainability
Disadvantages:
May suggest other alternative monetary policy targeting meaning changing
inflation targeting
It is costly to renew the monetary policy it includes additional workforce and
it is time costly
3. Shift to Other Monetary Policy Framework Targeting
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Central Banks are the guardians of macroenomic stability. In most cases, they
have been successful in discharging this responsibility because they have been allowed to
focus primarily on their role of promoting price stability, with their role intentionally
shifting from one development to one of stabilization.
Inflation targeting is monetary framework used by the BSP today. Another
alternative framework that the BSP may exercise is the Nominal GDP Targeting and
Exchange Rate Targeting.
Under a nominal GDP targeting framework, the policy authorities set targets
for nominal GDP adjusts operating targets in order to achieve the nominal GDP targets.
Policy adjustments under this targeting framework incorporate an automatic stabilizing
feature. Exchange rate targeting, the central bank can adjust its policy rates or performs
exchange rate operation in order to maintain an exchange rate target.
Advantages:
May be the solution to satisfactory attain and maintaining price stability
conducive to a balance and sustainable growth of the economy.
Disadvantages:
Lack of reliable advance indicator, which would hamper its success
Public understanding is less
Gamble on the Philippine situation towards development
RECOMMENDATIONS
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The recommendation formulated is based on the facts of the case and the
alternative courses of actions stated on the recent pages of the case study. According to
the scenario that the Bangko Sentral ng Pilipinas did not attain its inflation target range
from the 2003 2008 upon on its implementation on 2002, it is recommended to reassess
its current monetary policy framework in targeting inflation rates.
The trainees choose alternative number two to reassess its monetary policy
process to increase the chance to meet the inflation target set by the Bank and alternative
courses of action three other alternative monetary policy framework considerations. It is
advisable to find alternatives other than adjusting policy rates and governments rethinks
of inflation target, policy because the inflation targeting framework policy which is
exercise by the Bank didnt attain the desired inflation target range set by the BSP.Together with the reassessment of the inflation targeting the trainees also
recommend to consider a new alternative monetary policy because for eight years the
BSP didnt attain or reach its target range by using inflation target framework. Maybe
this time by using other framework it might meet the satisfactory level of measuring the
economic performance.
CONCLUSIONS
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Problems regarding to the failure of the BSP to reach it target range of may cause
a lot of harm not only to the economy itself but also to the areas associated with it the
community, our country, and the people Filipino.
After application of alternative courses of action - Reassess Inflation Targeting
Process the trainees conclude that further understanding of the process of inflation
targeting frameworks makes it more effective on the part of BSP to attain the targeted
inflation as well as making the prices stability as their major objective.
Looking ahead, the implementation of alternative course of action number three
Other Alternative Monetary Policy Framework Consideration the trainees believe that by
these means the Monetary Authority BSP will be more accurate and prudent in
measuring the Philippine economy.
It may also continuously affect the overall performance and operations of the BSP
and government and the economy. Full array of its policy instruments to maintain monetary
and financial stability that will reinforce confidence in the economy. Collaboration with
fiscal authorities and other regulatory agencies, as well as with its foreign/regional
counterparts, will help put the country in a stronger position to weather the ongoing global
financial storm.
POTENTIAL PROBLEM
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Upon choosing the alternative, one of the major issues in reassessing the inflation
target framework as used by the BSP is the additional need for the reliable information to
the study, the same way with the other course of action on considering other monetary
policy framework.
SOLUTIONS TO THE POTENTIAL PROBLEMS
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Seeking knowledge and aid from experts and skilled monetary authority
organizations (e.g. World Bank and International Monetary Fund) is the best potential
solution. In this way, the management can establish pro-active and preventive approaches
the Bangko Sentral ng Pilpinas can use and implement in the long run.
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REFERENCES
Books
BUENAVENTURA, R.C. B., Perspective from the Bangko Sentral ng Pilipinas Moneyand Banking in the Philippines, 2003
FROYEN, R.T. Macroeconomics: Theories and Policies, Prentice- Hall, Inc. 6th edition,
1999
LAMAN, R.M. et. al, Financial System, Market and management The Basics, 2008edition
MEDINA , R.G. Principles of Economics, 1st edition, 2003
RECTO, M.M. & CORAZON TOLENTINO. Practicum Guide Book. College of
Business Administration and Accountancy, CLSU. 2008
TETANGCO Jr., A.M., Central Banking: In Challenging Times, The Philippine
Experience, 2009
Documents
BANGKO SENTRAL NG PILIPINAS, 2008 BSP Annual Report
BANGKO SENTRAL NG PILIPINAS, 2009 4th
Quarter Inflation Report
BANGKO SENTRAL NG PILIPINAS, 2008 Open Letter on Inflation
Internet
. http://www.bsp.gov.ph/about/overview.asp
7:30 pm. February 12, 2010.
GOOGLEMAPS. http://www.googlemaps.com. 5:24 pm. March 19, 2010
BANGKO SENTRAL NG PILIPINAS. www.bsp.gov.ph/monetary/inflation.asp
3:12 pm. February 12, 2010
WIKIPEDIA. http://en.wikipedia.org/wiki/Inflation 2:20 pm. March 27, 2010
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http://www.bsp.gov.ph/about/overview.asphttp://www.googlemaps.com/http://www.bsp.gov.ph/monetary/inflation.asphttp://www.bsp.gov.ph/about/overview.asphttp://www.googlemaps.com/http://www.bsp.gov.ph/monetary/inflation.asp -
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EXHIBITS
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Exhibit 1. Philippine Selected Economic and Financial Indicator
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Exhibit 2. Monetary Policy of the Bansgko Sentral ng Pilipinas
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A confluence of global and supply-side factors resulted in these unanticipated
movements in commodity prices. First, the inherent volatility in commodity prices was
magnified by adverse weather conditions and speculative activities in global commoditymarkets as the US dollar weakened. Second, world oil prices became highly volatile due
to low global production capacity, tight refining capacity and increasing demand from
emerging market economies, while food prices soared because of the strong demand forcommodities used in bio-fuel production as well as rising fuel and fertilizer costs. All
these translated to unprecedented increases in domestic rice prices as well as the pump
prices of
The role of food and fuel prices should be stressed at this point. Food accounts for
almost half of the Philippine CPI basket, while fuel accounts for almost another 10
percent. Therefore volatilities in international food and oil prices pose huge risks to ourinflation path. In addition, tests of persistence have shown that commodity inflation in the
country tends to be protracted, with food more so than fuel. Thus, increases in rice and
fuel prices are particularly virulent as this figure prominently in Filipino consumers
expectations and could lead to clamors for upward adjustments in wage and transportfares.
How did the monetary authorities respond to emerging challenges to the inflation
outlook over the policy horizon?
The BSP calibrates monetary policy prudently, mindful of the inflation dynamicsin the Philippines.
In this situation, the BSP was aware that the initial rise in prices was primarily
supply in origin and that commodity shocks are transitory in nature. Therefore, followingan approach consistent with the widely accepted principle that supply side developments
are best addressed by non-monetary measures, the BSP kept its policy rates steady. TheBSP considered the rise in prices during the first half of the year as a shift in relativeprices and accommodated such first-round effects, allowing them to pass through in the
form of higher prices.
However, as supply shocks from rising food and energy prices continued over a
longer period, these contributed to second-round effects, affecting the wage and price-setting behavior of businesses and households by the end of the second quarter. A rise in
inflation expectations was also evident from surveys and financial market data, while the
BSPs forecasts showed the risk of inflation exceeding targets for 2008 and 2009. TheBSP responded to these second-round effects with decisive action and strong anti-
inflation pronouncements. It raised key policy rates by a total of 100 basis points from
June to August while strengthening its anti-inflation commentary.The inflation outlook started to improve in September, with the decline in
international commodity prices. Monetary authorities, however, took the view that with
the domestic elevated core inflation readings still rising, there were still price pressures in
the pipeline. The weaker peso also posed an upside inflation risk. Hence, the MonetaryBoard, during its October and November policy meetings opted to keep policy rates
steady to ensure that inflation and inflation expectations were kept at bay.
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Meanwhile, to address any possible tightness in financial markets as a result of
the global financial turmoil, monetary authorities implemented preemptive measures
aimed at providing adequate market liquidity and ensuring the orderly functioning of thefinancial system.
In December, the inflation outlook further improved, showing a decelerating path
over the policy horizon with average inflation falling within the target range in 2010.This outlook reflected the significant fall in the November inflation and the sharper-than-
expected slowdown in global economic growth. Given the downside risks associated with
the declines in commodity prices, the fall in inflation expectations, and the slowdown in
economic activity, the Monetary Board decided to reduce key policy rates by 50 basispoints during its 18 December policy meeting.
What is the outlook for inflation and monetary policy?
Latest baseline forecasts of the BSP show a deceleration in the inflation path; the
annual average inflation may settle within the target range of 2.5-4.5 percent in 2009 and
3.5-5.5 percent in 2010. The positive developments in the prices of commodities and the
recent string of low inflation numbers should significantly relieve inflationary pressuresand keep the publics inflation expectations well anchored. Moreover, prospects of
weaker world economic activity are expected to dampen demand, reducing price
pressures. Under this scenario, the BSP will continue to carefully consider opportunitiesto ease monetary policy, mindful of any potential tightening credit conditions.
We assure the President that the BSP will remain focused on achieving the
countrys price stability objective while providing an environment that ensures sufficientliquidity to support the economys growth requirements.
For the consideration of Her Excellency.
Very respectfully,AMANDO M. TETANGCO, JR.
Governor
26 January 2009
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