New Central Bank Act (RA No. 7653, as amended by RA No.

11211)

Objectives

The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable
economic growth and employment. The BSP also aims to promote and preserve monetary stability and
the convertibility of the peso.

Responsibilities

The BSP provides policy directions in the areas of money, banking and credit. It supervises operations of
banks and exercises regulatory and examination powers as provided in the New Central Bank Act and
other pertinent laws over the with quasi-banking operations of non-bank financial institutions.

Under the New Central Bank Act, the BSP performs the following functions, all of which relate to its status
as the Republic’s central monetary authority.

 Liquidity Management. The BSP formulates and implements monetary policy aimed at
influencing money supply consistent with its primary objective to maintain price stability.
 Currency issue. The BSP has the exclusive power to issue the national currency. All notes and
coins issued by the BSP are fully guaranteed by the Government and are considered legal tender
for all private and public debts.

 Lender of last resort. The BSP extends discounts, loans and advances to banking institutions
for liquidity purposes.

 Financial Supervision. The BSP supervises banks and exercises regulatory powers over non-
bank institutions performing quasi-banking functions.

 Management of foreign currency reserves. The BSP seeks to maintain sufficient international
reserves to meet any foreseeable net demands for foreign currencies in order to preserve the
international stability and convertibility of the Philippine peso.

 Determination of exchange rate policy. The BSP determines the exchange rate policy of the
Philippines. Currently, the BSP adheres to a market-oriented foreign exchange rate policy such
that the role of Bangko Sentral is principally to ensure orderly conditions in the market.

 Other activities. The BSP functions as the banker, financial advisor and official depository of the
Government, its political subdivisions and instrumentalities and government-owned and
-controlled corporations

Under the RA No. 11211, the BSP performs the following functions, all of which relate to its status as the
Republic’s central monetary authority.

 Financial Stability. The BSP shall promote financial stability and closely work with the National
Government, including, but not limited to, the DOF, SEC, the Insurance Commission and the
PDIC.
 Payment and Settlements. The BSP shall oversee the payment and settlement systems in the
Phiippines, including critical financial market infrastructures, in order to promote sound and
prudent practices consistent with the maintenance of financial stability.

 Financial Services. The BSP shall promote broad and convenient access to high quality financial
services and consider the interest of the public.
Governance of the Bank
The Monetary Board exercises the powers and functions of the BSP, such as the conduct of monetary policy and
supervision of the financial system. Its chairman is the BSP Governor, with five full-time members from the private
sector and one member from the Cabinet.

The Governor is the principal representative of the Monetary Board and of the Bangko Sentral and the chief executive
officer of the BSP and is required to direct and supervise the operations and internal administration of the BSP.

The Monetary Board

The powers and function of Bangko Sentral are exercised by its Monetary Board, which has seven
members appointed by the President of The Philippines.

In the exercise of its authority, the Monetary Board shall:

1. Issue rules and regulations it considers necessary for the effective discharge of the responsibilities
and exercise of the powers vested upon the Monetary Board and the Bangko Sentral. The rules
and regulations issued shall be reported to the President and the Congress within fifteen (15) days
from the date of their issuance;
2. Fix the interest and rediscount rates to be charged by the Bangko Sentral on its credit operations.

3. Prescribe monetary penalty whenever the reserve requirements of any bank or quasi-bank falls
bellow the required minimum.

4. Prescribe minimum risk-based capital adequacy ratios and may require banks to hold capital
beyond the minimum requirements commensurate to their risk profile.

5. Exercise regulatory and examination powers over money service business, credit granting
businesses, and payment system operators. The MB is empowered to authorize entities or
persons to engage in money service businesses.

6. Regularly assess price developments and outlook and, based on its analysis and evaluation
of inflationary pressures, use its policy instruments to attain and maintain price stability.

7. Forbid any bank, quasi-bank and non-stock savings and loan associations from doing business
in the Philippines over violation of cease and desist order under Sec. 37 of this Act.

8. Promulgate the implementing guidelines for the grant of informer’s reward who voluntarily give definite information
not yet in the possession of the Bangko Sentral leading to the: (a) arrest of bank directors or officers and/or BSP
personnel for violation of this Act; or (b) filing of criminal charges against any person for violation of Section 50 of
this Act.

The BSP Monetary Board

Chairman Benjamin E. Diokno

Members Carlos G. Dominguez III

Felipe M. Medalla
Juan De Zuniga, Jr.
Peter B. Favila
Antonio S. Abacan, Jr.
V. Bruce J. Tolentino
Price Stability – the general price level in an economy does not change much over time.

Prices will be stable when people have no more money or no less money than they need to make
the puchases they want to make.

To slow down the rate of price increase – decrease the supply of money in the economy by selling
government securities (e.g. treasury bonds). It is taking money out of the economy and replacing it
with government securities.

If there is less money in the economy, interest rates will tend to increase as borrowers compete for
loanable funds. Some borrowers may decide not to borrow money.

What is inflation?
Inflation refers to the rate of change in the average prices of goods and services typically purchased by
consumers. If inflation is low and stable, then we say that there is price stability. Inflation is typically
defined as the annual percentage change in the Consumer Price Index (CPI).

The CPI represents the average price of a standard basket of goods and services consumed by a typical
Filipino family for a given period. This standard basket contains hundreds of consumption items (such as
food products, clothing, water and electricity) whose price movements are monitored to determine the
change in the CPI, or the level of inflation.

The Philippine Statistics Authority calculates and announces the monthly CPI and the rate of inflation
based on a nationwide monthly survey of prices for a given basket of commodities. The PSA also
determines the composition of the CPI basket through surveys that are conducted periodically.

Why do we want price stability?

Studies based on the experience of many countries have shown that maintaining price stability supports
economic growth because it allows households and businesses (including export enterprises) to plan
ahead and arrive at betterinformed decisions about their consumption, investment, saving and production
needs. In the case of export firms, price stability allows them to price their products competitively,
reducing the risks related to the rising cost of raw materials.

Price stability also promotes income equality by protecting the purchasing power of the poor who often do
not have assets (real or financial) that allow them to hedge against inflation.

The consensus among economists and policymakers is that the primary objective of central banks should
be to achieve price stability. Thus, since the 1990s, a growing number of countries have granted
institutional independence to their central banks and enacted laws that committed the central banks’
monetary policy to achieving price stability.

Why is the BSP the main government agency responsible for promoting price stability?
Among the various government bodies, the Bangko Sentral ng Pilipinas (BSP) is uniquely qualified to
promote price stability because it has the sole ability to influence short-term market interest rates. By
influencing short-term interest rates, the BSP is able to affect the demand of households and firms for
various goods and services. Domestic demand and the aggregate supply of goods and services
determine the general price level.

Achieving price stability is a universal goal shared by central banks and monetary authorities all over the
world. This does not mean, however, that the BSP pursues price stability to the exclusion of other
objectives. Although the price stability objective is the BSP’s main priority, other economic goals—such as
promoting financial stability and achieving broad-based, sustainable economic growth—are given
consideration in policy decision-making. Thus, the BSP coordinates with other government agencies to
make sure that its policies are part of a consistent and coherent overall policy framework.

What is the BSP’s role in relation to inflation?

The BSP controls inflation through its conduct of monetary policy which is done primarily by moving its
policy interest rate. Adjustments in the interest rate for the BSP’s overnight reverse repurchase (RRP)
facility, the primary monetary policy instrument, typically leads to corresponding movements in market
interest rates, thus affecting the demand by households and firms for goods and services. This, together
with the aggregate supply of goods and services, determines the level of prices. Nevertheless,
movements in inflation can be driven by factors beyond the influence of the central bank, and this often
poses challenges for the BSP’s conduct of monetary policy. The inflation targeting framework of the BSP
recognizes these factors, which can include inflation pressures arising from (a) volatility in the prices of
agricultural products; (b) natural calamities or events that affect a major part of the economy; (c) volatility
in the prices of oil products; and (d) significant government policy changes that directly affect prices such
as changes in the tax structure, incentives, and subsidies.

What is monetary policy?

Monetary policy is a set of measures or actions implemented by the central bank to affect the supply
of money and credit 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, in support of its key
objective of keeping inflation low and stable.

How does the BSP implement monetary policy?

The BSP implements monetary policy using various instruments to achieve the inflation target set by the
National Government.

The primary monetary policy instrument of the BSP is the overnight RRP rate. The RRP rate is the rate at
which the BSP borrows money from commercial banks within the country. The BSP raises or reduces its
overnight RRP rate depending on the BSP’s assessment of the outlook for inflation and GDP growth, and
in doing so, implements its monetary policy stance. If the BSP perceives the inflation forecast to exceed
the target, then it can implement contractionary monetary policy by raising its policy interest rate. On the
other hand, if the BSP sees the inflation forecast to be lower than the target or there is need to increase
liquidity in the financial system, then it can implement expansionary monetary policy by reducing its policy
interest rate.

To contract or expand liquidity in the financial system, the BSP can also do the following actions:
 increasing/decreasing the reserve requirement;
 encouraging/discouraging deposits in the overnight deposit facility (ODF) and term deposit facility
(TDF) by banks;
 increasing/decreasing the rediscount rate on loans extended by the BSP to banking institutions
on a short-term basis against eligible collaterals of banks’ borrowers; and
 outright sales/purchases of the BSP’s holdings of government securities

BSP Monetary Policy

The primary objective of BSP's monetary policy is to promote a low and stable inflation conducive to a
balanced and sustainable economic growth and employment.

The BSP attempts to control inflation by engaging in open market operations and other monetary
policy tools such as reserve requirements and rediscounting to expand or contract money supply. It may
also grant loans and advances to banking institutions to influence the volume of credit.
Open Market Operations
Policy Rate Setting
This approach involves the announcement of an explicit inflation target that the BSP promises to achieve
over a given time period. The target inflation rate is set and announced jointly by the BSP and the
government through an inter-agency body. Although the responsibility of achieving the target rests primarily
with the BSP, this joint announcement reflects active government participation in achieving the goal of price
stability and government ownership of the inflation target.

In the Philippines, the interest rates applied on the overnight Repurchase Agreement (RP)/ Reverse
Repurchase Agreement (RRP) signals the stance of BSP’s monetary policy. RP is an agreement between
parties where the buyer agrees to temporarily purchase a basket or group of securities for a specified
period. The buyer agrees to sell those same assets back to the original owner at a slightly higher price
using RRP.

Policy Instruments

The BSP implements monetary policy using various instruments to influence the level of liquidity in the
market and thereby steer inflation towards the target level. These instruments can be classified into two
types:

 Direct instruments enable the BSP to control directly certain items in banks’ balance sheets which
may be in the form of financial prices or quantities. Direct instruments have a strong coercive
element as in the case of reserve requirements and directed lending requirements.

Reserve Requirements. In order to control the volume of money created by the credit operations
of the banking system, all banks shall be required to maintain reserves in proportion to their deposit
liabilities (and may include funds held in trust and liabilities for deposit substitutes) and shall
ordinarily take the form of a deposit in the BSP.

Loans to Banking and Other Financial Institutions. The rediscounts, discounts, loans and
advances which the BSP is authorized to extend to banking institutions shall be used to influence
the volume of credit.

Loans for Liquidity Purposes. The BSP may extend loans and advances to banking institutions
for a period of not more than 7 days without any collateral for providing liquidity to the banking
 system in times of need.

Emergency Loans. In periods of national and/or local emergency or of imminent financial panic
which directly threaten monetary and financial stability, the Monetary Board may authorize BSP to
grant extraordinary loans or advances to banking institutions secured by assets.

International Monetary Stabilization. The BSP shall maintain international reserves adequate to
meet any foreseeable net demands on the BSP for foreign currencies. The Board shall give special
attention to the volume and maturity of the Bangko Sentral’s own liabilities in foreign currencies, to
the volume and maturity of the foreign exchange assets and liabilities of other banks operating in
the Philippines and, insofar as they are known or can be estimated, the volume and maturity of the
foreign exchange assets and liabilities of all other persons and entities in the Philippines.
International Reserves may include but not limited gold and assets in foreign currencies in the
form of:
 documents and instruments customarily employed for the international transfer of funds;
 demand and time deposits in central banks, treasuries and commercial banks abroad;
 foreign government securities; and
 foreign notes and coins.

 Indirect instruments work through the market to influence the behavior of financial institutions,
usually through the pricing of central bank facilities. Indirect instruments include adjustments in
short-term policy interest rates and the conduct of open market operations (OMO).

Mechanics of Open Market Operation (OMO)

OMO is a monetary tool which involves the BSP publicly buying or selling government securities from
banks and financial institutions in order to expand or contract the supply of money. By controlling the
money supply, the BSP is able to exert some influence on the prices of goods and services and achieve its
inflation objectives.

When the BSP buys securities, it pays for them by directly crediting its counterparty’s Demand Deposit
Account that is being maintained with the BSP. Effectively, the transaction increases the buyer’s level of
reserves and on an aggregate level, expands the system’s money supply. Conversely, when the BSP sells
the securities, the buyer’s payment (via direct debit against the buyer’s Demand Deposit Account with the
BSP) reduces his reserve account causing money supply to contract.

In conducting OMO, the BSP uses two instruments: (1) repurchase (repo)/reverse repurchase (reverse
repo) agreements and (2) outright purchases and sales of securities.

 Repurchase (repo) / reverse repurchase (reverse repo) agreements. The BSP purchases
government securities from a bank with a commitment to sell it back at a specified future date at a
predetermined rate. In effect, a repo transaction expands the level of money supply as it increases
the bank’s level of reserves. Under a reverse repo, the BSP acts as the seller of government
securities, thus, the bank’s payment reduces its reserve account resulting in a contraction in the
system’s money supply. For both repos, the BSP can only affect the level of money supply
temporarily, given that the parties involved commit to reverse the transaction at an agreed future
date. At present, the BSP enters into repo agreements for a minimum of one (1) day (overnight) for
both repos and a maximum of 91 days and 364 days for repo and reverse repo agreements,
respectively.

 Outright purchases and sales of securities. An outright contract involves direct purchase/sale of
government security 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.