the bsp’s conduct of monetary policy · pdf file9/16/2014 1 the bsp’s conduct of...

9/16/2014

1

The BSP’s

Conduct of Monetary Policy

Development Academy of the Philippines

19 September 2014

Tagaytay City

ARNEL ADRIAN C. SALVA

Bank Officer V

Economic and Financial Learning Center

OUTLINE

A. Introduction

B. Inflation and Price Stability

C. Monetary Policy and Inflation Targeting

D. Inflation: Recent Trends and Outlook

E. Contemporary issues in Monetary Policy

2

9/16/2014

2

OUTLINE

A. Introduction





3

“ …primary objective is tomaintain

price stability conducive to a

balanced and sustainable economic

growth…”

“…shall have supervision over the operations of

banks and exercise such regulatory powers… over

the operations of finance companies, non-bank financial

institutions performing quasi-banking functions, or quasi-

banks and institutions performing similar functions…”

Section 3 RA No. 7653

(New Central Bank Act)

4

BSP’s Mandate

The BSP : Guardian of price stability

9/16/2014

3

Price stability through

the conduct of monetary policy

Financial stability through

banking supervision and regulation

Efficient payments and

settlements system through

operation of real-time gross

settlement system

Pillars of Central Banking

5

The BSP : Guardian of price stability

OUTLINE

A. Introduction





6

9/16/2014

4

Price stability

• “An environment in which inflation is

sufficiently low that it is no longer a

consideration in the economic decisions of

households and firms” – Alan Greenspan

• “Prices are stable when ordinary people stop

talking about inflation.” - Alan Blinder

What is price stability?

7

What is price stability?

Price stability

• On average, prices

neither increase

nor decrease

markedly

• There is low and

stable inflation

8

9/16/2014

5

What is inflation?

Inflation

• sustained increase in the

average prices of goods and

services typically purchased by

consumers

• measured as the annual

percentage change in the

Consumer Price Index

9

How are prices measured?

Inflation Rate –

� annual percentage change

in consumer price index

Consumer Price Index –

� represents the average

price of a standard basket

of goods and services

consumed by a typical

Filipinos family for a given

period

Inflation =sustained increase in the average prices of goods and services typically

purchased by consumers

10

9/16/2014

6

Average cost of basket of commodities

� Consumers will still fixate on the rise in prices rather than on the

slowdown in inflation.

Year 1 Year 2 Year 3

Price level P100 P110 P120

Increase in prices P10 P10

Inflation (Rate of

increase in prices)

10.0% 9.1%

How are prices measured?

11

What causes inflation?

Prices increase when…

Changes in price level result from interaction of

supply and demand.

• Supply < Demand

• Demand > Supply

Prices decrease when…

• Supply > Demand

• Demand < Supply

12

9/16/2014

7


Types of inflation

Cost-push

• Due to increase in cost of

production and other

supply factors

(e.g., weather disturbances,

increase in world oil prices)

• Outside the influence of BSP

13


Types of inflation

Demand-pull

• Due to excess demand relative to supply of goods

and services (e.g., increase

money supply)

• BSP exerts influence over

money supply and thus can

control inflation

14

9/16/2014

8

Economic

growth and

develop-

ment

Low and

stable

inflation

Increases certainty in

decision-making:

• Consumption

•Saving

•Investment

•Production

Efficient

allocation of

resources

Promotes confidence in financial

instruments as a form of savings

Has positive

effects on

income

redistribution

Preserves

purchasing power

Why is price stability important?

15

OUTLINE

A. Introduction





16

9/16/2014

9

BSPDEMAND

for goods

and services

Availability

and cost of

MONEYInflation

Monetary

Policy

Actions by a central bank to

manage theavailability and

cost of money and credit to attain

stable prices

� Policy rates – RRP/RP

� Open market operations

� Reserve requirement

� Rediscounting

� Special Deposit Account

Instruments

What is monetary policy?

17

PRICE STABILITY

to a

ttain

Actions by a central bank to manage the

availability and cost of money and credit to attain stable prices

Price of

Money and Credit

Level of

Money and Credit

Level of

Money and Credit


Monetary Policy

18

9/16/2014

10

Actions by a centralbank to manage theavailability and costof money and creditto attain stable prices

Refers to the

level of money or

credit supply

which a central

bank can directly

control

Level of

Money and Credit

Level of

Money and CreditMonetary Policy


19

Actions by a centralbank to manage theavailability and costof money and creditto attain stable prices

Refers to the

“price” of savings/

investment which

influences how

much and where

money goes

Price of

Money and Credit

Monetary Policy

Level of

Money and Credit

Level of

Money and Credit


20

9/16/2014

11

Monetary

Policy

Level of

Money and Credit

Price of

Money and Credit

PRICE STABILITY

to a

ttain

Quantity

instruments

Price

instruments

What are the tools for monetary policy?

21

Monetary Policy instruments

Quantity

instruments

• control directly the availability

or level of loanable funds (e.g., reserve requirements,

rediscounting)

Price

instruments

• influence the rate of return on

financial instruments(i.e., RRP and RP rates)


22

9/16/2014

12

1. Open market operations (OMO) - involves the buying

and selling of government securities from/to the public

as well as repurchase and reverse repurchase

agreements (the RP/RRP rate is the main policy

instrument)

To liquidity Reduce RRP rates or

Purchase of GS

Market/

BSP will

release

money into

the system

23

Raise RRP rates or

Sale of GS

Market/

BSP will

siphon off

money from

the system

To liquidity


23

2. Reserve Requirement – amount of money/liquid

assets that banks are required to deposit with the

BSP

To liquidity Lower RR

Banks have

more money

for lending

& investments

To liquidity Raise RR

Banks have

less money

for lending

& investments


24

9/16/2014

13

3. Rediscounting facility – a BSP facility that provides

refinancing for banks for credits extended to the

private and public sectors

• To contract or expand liquidity in the financial

system, the BSP can increase/decrease the

rediscount rate (linked to the policy rate) or

decrease/increase the rediscounting budget


25

Banks are

encouraged

to refinance

loans with BSP

To liquidity

Increase

rediscounting

budget/

reduce

policy rate

(accordingly,

rediscounting

rate is also

reduced)

Banks tend

to reduce

excess

reserves;

cheaper to

refinance

loans

Rediscounting facility


26

9/16/2014

14

Banks are

discouraged

to refinance

loans with BSP

To liquidity

Reduce

rediscounting

budget/

increase

policy rate

(accordingly,

rediscounting

rate is also

increased)

Banks tend

to raise

excess

reserves;

more costly

to

refinance

loans

Rediscounting facility


27

4. Special Deposit Account (SDA) facility - a BSP deposit

facility for banks and trust entities of BSP-

supervised financial institutions

• To contract or expand liquidity in the financial

system, the BSP can encourage/discourage

deposits in the SDA by increasing/decreasing

the SDA rate


28

9/16/2014

15

Consumption

Investment

Government

Spending

Exports

Imports

Quantity

instruments

Price

instruments

Affect

Total Aggregate Demand

Inflation

How does monetary policy affect prices?

Monetary Policy manages inflation by influencing aggregate demand and hence, output growth in the economy.

29

Credit

ExpectationsNet

external

demand

Exchange

rate

Import

prices

Asset prices

Supply

Stage 3Stage 1 Stage 2

15-21 months

Total

demand

Domestic

inflationary

pressure

Domestic

demand

INFLATION

Interest

Rate

POLICY

INSTRUMENTS

How does monetary policy affect prices?

Thru transmission channels

30

9/16/2014

16

• Involves the central bank

publicly announcing an

inflation target which it promises to achieve over a certain period

• Formally adopted by the BSP in January 2002 as its monetary policy framework

Inflation targeting

What is the BSP’s monetary policy framework?

31

• Is forward-looking

• Reflects a comprehensive approach to policy by taking into consideration the widest set of available information about the economy

• Increases accountability of the BSP and helps build credibility

• Promotes transparency in monetary policy

Why did the BSP adopt IT?

Inflation targeting

32

9/16/2014

17

• Set a target inflation rate - explicit inflation targets for some period ahead

• Forecast the future path of inflation - using a model that uses relevant variables and information indicators

• Compare forecast with the target

• Difference determines the extent that monetary policy has to be adjusted

How does inflation targeting work?

Inflation targeting: essential elements

33

Data disclosure and policy communication

• Quarterly inflation report - serves as a monetary policy statement

• Press releases at the time of monetary policy decision - done eight times a year

• Highlights of the meeting of the Monetary Board on monetary policy - lag of four weeks

• Speeches by the Governor and other senior BSP officials - public presentations and information campaign.

• Open letter addressed to the President of the Philippines.


34

9/16/2014

18

Circumstances when the BSP is not held accountable for deviations from inflation target

• High prices of agricultural products

• High prices of oil products

• Significant government policy changes that directly affect prices (e.g., new taxes and subsidies)

• Natural disasters and calamities affecting major sectors of the economy


BSP’s explanation clauses

35

Government sets

inflation target

2 years in advance

(in consultation with BSP)

2014 – 4.0 + 1.0

2015-2016 – 3.0 + 1.0

BSP announces

inflation target

BSP:• Assesses monetary conditions

• Forecasts inflation

• Conducts monetary policy

Is inflationforecast in line with

target?

BSP ADJUSTS POLICY RATES

BSP communicates through:

• Highlights of MB meetings

on monetary policy

discussions

• Inflation Report

• Press statement

• issues Open letter to the

President (as needed)

YES

NO

NO CHANGE IN POLICY

RATES

Inflation targeting framework


36

9/16/2014

19

• Establishment of point target– Prior to 2008, inflation targets were given by a range

(ex: Inflation target 2007: 4-5%)

• Establishment of medium-term inflation target– Beginning 2010, BSP announces a medium-term inflation

target to help anchor inflation expectations

Recent developments in BSP’s IT framework


Inflation target for 2014: 4.0 + 1.0%

Inflation target for 2015-2016: 3.0 + 1.0%

37

OUTLINE

A. Introduction





38

9/16/2014

20

Headline inflationYear-on-year change in percent

Power crisis

Oil price hike, peso depreciation, natural calamities (e.g., earthquakes)

Rice crisis

Asian financial crisis, El Niño

Peso depreciation, oil price hike

Oil price hike

RVAT

Oil price hike and rise in prices of agricultural

commodities

Aug

4.9%

Jan-Aug 2014 average inflation at 4.4%

Inflation targeting

39

How has inflation behaved over the years?

39

YearActual Inflation(in percent)1

Inflation Target(in percent) 2

2002 2.9 4.5 −−−− 5.5

2003 3.0 4.5 −−−− 5.5

2004 5.5 4.0 −−−− 5.0

2005 7.6 5.0 −−−− 6.0

2006 6.2 4.0 −−−− 5.0

2007 2.9 4.0 −−−− 5.0

2008 8.3 4.0 ±±±± 1.0

2009 4.2r 3.5 ±±±± 1.0

2010 3.8r 4.5 ±±±± 1.0

2011 4.6r 4.0 ±±±± 1.0

2012 3.2 4.0 ±±±± 1.0

2013 3.0 4.0 ±±±± 1.0

2014 4.4 YTD as of August 4.0 ±±±± 1.0

How has inflation performed vis-à-vis targets?

1/ Actual inflation figures used for 2002-2004, 2005-2006, and 2007-2012 were the 1994-, 2000-, and 2006-based CPI series, respectively. 2/ Annual targets r/ Revised 40

9/16/2014

21

What is the outlook for inflation?

Latest inflation forecasts indicate that inflation remains

close to the upper end of inflation target band.

� Inflation at 3.0 percent in 2013,

within the target range of 3-5

percent

� The emerging forecasts point to

average inflation to remain

within target, but the balance of

risks to future inflation continues

to lean toward the upsideo 4. 0 + 1.0 (2014)

o 3.0 + 1.0 (2015-2016)

The fan chart shows the probability of various outcomes for inflation over the forecast horizon. The darkest band depicts the central projection, which

corresponds to the BSP’s baseline inflation forecast. It covers 25 percent of the probability distribution. Each successive pair of bands is drawn to cover a

further 25 percent of probability, until 75 percent of the probability distribution is covered. Lastly, the lightest band covers the lower and upper 90 percent of

the probability distribution. The bands widen (i.e., “fan out”) as the time frame is extended, indicating increasing uncertainty about outcomes. The band in

wire mesh depicts the inflation profile in the previous report.

The shaded area, which measures the range of uncertainty, is based on the forecast errors from the past years. In greater detail, it can be enhanced by

adjusting the level of skewness of the downside and upside shocks that could affect the inflationary process over the next two years in order to change the

balance of the probability area lying above or below the central projection.

* Source: BSP Inflation Report Q2 2014

41

� Higher food prices due to tight domestic supply

� Port congestion

� Pending petitions for power rate hikes

� Looming power shortages

� Liquidity growth

� Upside Risks

� Downside Risks

� Slower global economic activity

� Fiscal underspending

Risks surrounding the inflation outlook remain

42

What is the outlook for inflation?

9/16/2014

22

OUTLINE

A. Introduction





43

Growth is supported mainly by the

strong services and industry

sectors, and net exports and

household consumption.

44

Strong GDP growth

and well-managed inflation

Well-calibrated monetary policy

kept 2013 average inflation within

government target of 3-5 percent

for the year.

Inflation is projected

to remain within target in 2014

44

How is the Philippines performing?

44

9/16/2014

23

45

Sound and stable banking system

45

0

5

10

15

20

25

0

2,000

4,000

6,000

8,000

10,000

12,000

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

Jun

-13

Jun

-14

Levels (in billion PhP)

Growth Rate

Asset Growth

2001 – Jun 2014

0

5

10

15

20

25

30

35

40

45

Jan Mar May Jul Sept Nov Jan Mar May Jul Sept Nov Jan Mar May Jul Sept Nov Jan Mar May Jul Sept Nov Jan Mar May Jul

Bank Lending M3

Bank lending: 21.8%

(July 2014)

M3: 18.3% (July

2014)


45

* Data for 2004-2010 based on BPM5; 2011 onwards based on BPM6

inflow

outflow

Healthy external payments position

� Current account remains in surplus

� OF remittances show continued

resilience

� Foreign exchange reserves continue

to build up


46

9/16/2014

24

Domestic financial markets experiencing volatility

but still well contained

� Following economic recovery in

advanced economies, Philippine

financial markets experienced

volatility, which has eased recently

47Note: Based on last done deal transaction (closing price) as of 4:00pm.

5000

5500

6000

6500

7000

7500

8000

Jan

-13

Fe

b-1

3

Ma

r-1

3

Ap

r-1

3

Ma

y-1

3

Jun

-13

Jul-

13

Au

g-1

3

Se

p-1

3

Oc

t-1

3

No

v-1

3

De

c-1

3

Jan

-14

Fe

b-1

4

Ma

r-1

4

Ap

r-1

4

Ma

y-1

4

Jun

-14

Jul-

14

Au

g-1

4

Se

p-1

4

Philippine Stock Exchange Index (PSEi)

(in index points, as of 9 September 2014)

PEAK: 7,392.2 index pts

(15 May)

LOWEST: 5,738.1 index pts

(28 August)

End-20135,889.8 index pts

As of 9 Sept

7,253 index pts

0

50

100

150

200

250

300

350

Jan

-13

Fe

b-1

3

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Se

p-1

3

Oct

-13

No

v-1

3

De

c-1

3

Jan

-14

Fe

b-1

4

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

Jul-

14

Au

g-1

4

Se

p-1

4

Philippines Indonesia Thailand Malaysia

5-Year CDS Spreads of Selected ASEAN Countries

(In basis points as of 5 September 2014)

As of 5 Sept

IDN: 128

PHL: 79

THA:82

MLY: 77

LOWEST

IDN: 124

PHL:79

THA:80

MLY:68

PEAK

IDN: 303

PHL: 157

THA:170

MLY:157


Philippine Credit Rating

BBB-

Re-affirmed investment rating

with stable outlook

25 March 2014

BBB

Upgraded from BBB-

with stable outlook

9 May 2014

BBB

Upgraded to investment rating

with stable outlook

7 May 2013

BBB-

Affirmed credit rating at BBB-

changed outlook from stable to positive

2 August 2013

Baa3 Upgraded to investment rating

with positive outlook

3 October 2013

� Third party affirmation is a show of faith

� Investment grade rating upgrades boost investor confidence

Growing third party recognition


48

9/16/2014

25

What is the global outlook?

� Overall global economic

conditions remain fragile

� Downside risks remain

a concern as increased

geopolitical risks could

lead to sharply higher

oil prices

2013

April July April July

World Output 3.2 3.6 3.4 3.9 4.0

Advanced economies 1.3 2.2 1.8 2.3 2.4

US 1.9 2.8 1.7 3.0 3.0

Euro Area -0.4 1.2 1.1 1.5 1.5

Japan 1.5 1.4 1.6 1.0 1.1

4.7 4.9 4.6 5.3 5.2

China 7.7 7.6 7.4 7.3 7.1

India 5 5.4 5.4 6.4 6.4

ASEAN-5* 5.2 4.9 4.6 5.4 5.6

* Indonesia, Malaysia,Philippines,Thailand, and Vietnam.

Source: IMF WEO Update, July 2014

Emerging and Developing

Economies

2014 2015

IMF WEO Projections

Year-on-Year Growth

(in percent)

49

a/ Based on assumptions adopted by the Development Budget Coordinating Committee (DBCC) on 20 June 2014.

b/ Approved by the Monetary Board on 5 June 2014.

c/ Cash remittances coursed through banks.

* Balance of Payments and International Investment Position Manual, Sixth Edition (BPM6).

Actual Projections

2013 2014

Real Gross Domestic Product (GDP) (%) 7.2 6.5 – 7.5 a/

Headline Inflation (%, 2006=100) 3.0 3.0 – 5.0 a/

Exports of Goods (% growth)

Balance of Payments concept*

PSA data-3.6

8.8

6.0a/

Imports of Goods (%)

Balance of Payments concept*

PSA data

-3.1

0.59.0 a/

Overseas Filipinos Remittances (US$ billion)c/

Growth Rate (%)

23.0

7.4

24.1 b/

5.0 b/

Current Account (US$ billion) 9.4 6.0b/

Balance of Payments (US$ billion) 5.1 1.1b/

Gross International Reserves (US$ billion) 83.2 85.3b/

What is the outlook for the Philippines?

50

9/16/2014

26

� Fragile and uneven global economic

recovery

� Tapering of QE measures in the US

� Economic slowdown in key emerging

markets

� Short-term imbalances from calamities

� Recurrent volatility in financial markets

Key challenges from global and domestic fronts

51

Image credit: philstar.com

What are we concerned about?

On monetary stability: sustain appropriate monetary stance

� Continued vigilance over inflation dynamics to safeguard non-inflationary

growth

On financial stability: continue to initiate key reforms

� Implement macroprudential measures to minimize systemic risks

� Enhance corporate governance framework

� Support capital market development

� Sustain advocacies on microfinance, financial inclusion and consumer

protection

On external sector stability: strengthen resilience to external shocks

� Maintain market-determined exchange rate

� Keep comfortable level of reserves and ensure manageable external debt

profile

52

BSP is committed to staying the course

What is our game plan?

9/16/2014

27

Microfinance

Proactive stance in microfinance to

support the development of a

sustainable microfinance business

environment

Economic and Financial

Learning Program (EFLP)

Continue implementation of EFLP to

promote greater public awareness of

economic and financial issues to enable

households and businesses to make

well-informed economic and financial

decisions

Promotion of economic & social development

thru key advocacy programs :

What is our game plan?

53

Key Take-aways:

54

• The primary objective of the BSP is to maintain price stability, conducive to a

balanced and sustainable growth.

• The BSP achieves price stability through monetary policy, or actions to manage

the availability and cost of money and credit. The framework that guides the

central bank in deciding if monetary policy needs to be adjusted and by how

much is inflation targeting.

• The Philippine economy is not immune but is well-insulated: global spillovers

manageable, given homegrown sources of resilience

• There is policy space/flexibility to ride out headwinds: macro stabilization

through nimble and forceful policy responses, if needed

• The BSP will remain committed towards the achievement of its mission: to

promote and maintain price stability conducive to a balanced and sustainable

growth of the economy.

9/16/2014

28

www.bsp.gov.ph

[email protected]

the bsp’s conduct of monetary policy · pdf file9/16/2014 1 the bsp’s conduct of...

Documents