BSP Control Instruments in Monetary Policy

Monetary Policy Johnson defines monetary policy “as policy employing central bank’s control of the supply of money as an instrument for achieving the objectives of general economic policy.” R.P. Kent has defined the monetary policy as “The management of the expansion and contraction of the volume of money in circulation for the explicit purpose of attaining a specific objective such as full employment.”

Objective or Goals of Monetary Policy Full Employment To increase production and demand Price Stability promotes business activity and ensures equitable distribution of income and wealth.  Economic Growth process whereby the real per capita income of a country increases over a long period of time. Balance of Payments equilibrium in the balance of payments

Monetary Policy Instruments 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 purpose of influencing the price level. In the Philippines, monetary policy instruments are classified into: Open Market Operations Rediscounting Reserve Requirement Direct Controls Moral Suasion

Open Market Operations (OMO) It involves the buying and selling of government securities from banks and financial institutions of the BSP in order to expand or contract the supply of money.

Rediscounting This refers to transactions whereby the BSP extends credit to a bank collateralized by its loan papers with customers. This Instrument plays a dual role; as a tool to allocate credit to preferred sectors of the economy and as an instrument to influence the supply of money and credit.  Rediscounting Rate is the interest rate charged by the BSP to the banks that borrow from them.

 Reserve Requirement  This is the minimum amount of reserves that bank must hold against deposits. The reserve requirements which are held by banks as cash in their vaults and deposits with the BSP, help to control the money and credit by affecting the demand for money reserves and the money multiplier.  It serves as a prudential safeguard for depositors. 

Direct Controls This consist of quantitative and qualitative limits on the ability of banks to undertake certain activities. The most common type of direct controls include limitations on aggregate bank lending, selective limitations on certain types of banks lending and interest rate regulations.

Moral Suasion  The BSP persuade banks to make their lending policies responsive to the needs of the economy. Banks must tighten their credit programs in times of inflation and loosen them in times of recession.