Your SlideShare is downloading. ×
PPT- BSP ECon 151
Upcoming SlideShare
Loading in...5
×

Thanks for flagging this SlideShare!

Oops! An error has occurred.

×

Introducing the official SlideShare app

Stunning, full-screen experience for iPhone and Android

Text the download link to your phone

Standard text messaging rates apply

PPT- BSP ECon 151

4,648
views

Published on

Published in: Economy & Finance, Business

2 Comments
1 Like
Statistics
Notes
  • LA PERSONA QUE ME LO ENVIO ESTA TODAVIA ASOMBRADA DE LO OCURRIDO, YA QUE ELLA DICE QUE LO HIZO POR HACERLO Y QUE PIDIO ALGO QUE CREIA CASI IMPOSIBLE DE LOGRAR PROBEMOS. * Para ti mismo di el nombre de la unica persona del sexo opuesto con quien quieras estar (tres veces...)... * Piensa en algo que quieras lograr dentro de la proxima semana y repitelo para ti mismo(a) (seis veces)... * Piensa en algo que quieras que pase entre tu y la persona especial (que dijiste en el no. 1) y dilo a ti mismo/a (doce veces)... * Ahora haz un ultimo y final deseo acerca del deseo que escogiste. * Despues de leer esto tienes 1 hora para mandarlo a 15 temas y lo que pediste se te hara realidad en 1 semana. A la mayor cantidad de gente a quien lo mandes mas fuerte se hara tu deseo. Si tu escoges ignorar esta carta lo contrario del deseo te sucedera, o esto no sucedera jamas.............. Que tus días estén llenos de logros y tus noches de sueños copia y pega esto en 15 o + tema
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
  • harararara
       Reply 
    Are you sure you want to  Yes  No
    Your message goes here
No Downloads
Views
Total Views
4,648
On Slideshare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
306
Comments
2
Likes
1
Embeds 0
No embeds

Report content
Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

Cancel
No notes for slide

Transcript

  • 1. The BSP’s Conduct of Monetary Policy ZENO RONALD R. ABENOJA Director Economic and Financial Learning Center University of the Philippines Manila 13 July 2011
  • 2. OUTLINEA. IntroductionB. Inflation and Price StabilityC. Monetary Policy and Inflation TargetingD. Inflation: Recent Trends and Outlook Inflation:E. Contemporary issues in Monetary Policy
  • 3. OUTLINEA. IntroductionB. Inflation and Price StabilityC. Monetary Policy and Inflation TargetingD. Inflation: Recent Trends and Outlook Inflation:E. Contemporary issues in Monetary Policy
  • 4. The BSP : Guardian of price stabilityThe primary objective of theBangko Sentral is to maintainprice stability conducive to abalanced and sustainablegrowth of the economy. -Sec. 3, RA 7653 (New Central Bank Act) The BSP formulates and implements monetary policy consistent with its price stability objective.
  • 5. OUTLINEA. IntroductionB. Inflation and Price StabilityC. Monetary Policy and Inflation TargetingD. Inflation: Recent Trends and Outlook Inflation:E. Contemporary issues in Monetary Policy
  • 6. What is price stability?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
  • 7. What is price stability?Price stability• On average, prices neither increase nor decrease markedly• There is low and stable inflation
  • 8. 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?CPI• represents the average price of a standard basket of goods and services consumed by a typical Filipino family for a given period Positive rate of change in CPI = Inflation Rate
  • 10. What causes inflation? Prices increase when… • Supply < Demand • Demand > Supply Prices decrease when… • Supply > Demand • Demand < SupplyChanges in price level result from interaction of supply and demand.
  • 11. What causes inflation?Types of inflationCost-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
  • 12. What causes inflation?Types of inflationDemand-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
  • 13. Why is price stability important?Impact of high inflation on the economy Distorts economic Inefficient decisions: allocation High • consumption of • saving resources and • investment volatile • production Slowerinflation economic Lower confidence in financial growth instruments as a form of savings Negative Loss of effects on purchasing income power distribution
  • 14. OUTLINEA. IntroductionB. Inflation and Price StabilityC. Monetary Policy and Inflation TargetingD. Inflation: Recent Trends and Outlook Inflation:E. Contemporary issues in Monetary Policy
  • 15. What is Monetary Policy? Level of Money and Credit Monetary Policy Price of Money and CreditActions by a centralbank to manage the to attainavailability and costof money and creditto attain stable prices PRICE STABILITY
  • 16. What is Monetary Policy? Level of Monetary Policy Money and CreditActions by a centralbank to manage theavailability and cost Refers to theof money and credit level of money orto attain stable prices credit supply which a central bank can directly control
  • 17. What is Monetary Policy? Level of Money and Credit Monetary Policy Price ofActions by a central Money and Creditbank to manage theavailability and cost Refers to theof money and credit “price” of savings/to attain stable prices investment which influences how much and where money goes
  • 18. What are the tools of Monetary Policy? Level of Quantity instruments Money and CreditMonetary Policy Price of Price Money and Credit instruments to attain PRICE STABILITY
  • 19. What are the tools of Monetary Policy?Monetary Policy instruments • control directly the availability Quantity or level of loanable funds instruments (e.g., reserve requirements, rediscounting) Price • influence the rate of return on instruments financial instruments (i.e., RRP and RP rates)
  • 20. What are the tools of Monetary Policy?Monetary Policy instruments1. 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) Market/ Reduce RRP rates or BSP willTo liquidity Purchase of GS release money into the system Market/ Raise RRP rates or BSP willTo liquidity Sale of GS siphon off money from 20 the system
  • 21. What are the tools of Monetary Policy?2. Reserve Requirement – amount of money/liquid assets that banks are required to keep in their vaults or deposit with the BSP Banks have more moneyTo liquidity Lower RR for lending & investments Banks have less moneyTo liquidity Raise RR for lending & investments
  • 22. What are the tools of Monetary Policy?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 (pegged to the policy rate) or decrease/increase the rediscounting budget
  • 23. What are the tools of monetary policy? Rediscounting facility Increase rediscounting Banks tend budget/ to reduce Banks are reduce excess encouragedTo liquidity policy rate reserves; to refinance (accordingly, cheaper to loans with BSP rediscounting refinance rate is also loans reduced)
  • 24. What are the tools of monetary policy? Rediscounting facility Reduce Banks tend rediscounting to raise budget/ excess Banks are increase reserves;To liquidity discouraged policy rate more costly to refinance (accordingly, to loans with BSP rediscounting refinance rate is also loans increased)
  • 25. What are the tools of Monetary Policy?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 RRP rate (since the SDA rate is pegged to the policy rate)
  • 26. How does Monetary Policy affect prices? Total Aggregate Demand Consumption Quantity instruments Investment Affect Government Spending Inflation Price instruments Exports ImportsMonetary Policy manages inflation by influencing aggregate demand and hence, output growth in the economy.
  • 27. How does Monetary Policy affect prices?Transmission channels – how monetary policyaffects price and real variables Supply Interest Domestic Rate demand Domestic Total inflationary Credit demand pressure POLICY INSTRUMENTS INFLATION Expectations Net external Asset prices demand Import Exchange prices rate Stage 2 Stage 3 Stage 1 15-21 months
  • 28. What is the BSP’s Monetary Policy framework?Inflation targeting• 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
  • 29. Why did the BSP adopt IT?Inflation targeting• 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
  • 30. How does inflation targeting work?Inflation targeting: essential elements• 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
  • 31. How does inflation targeting work?Inflation targeting: framework Government sets inflation target 2 years in advance (in consultation with BSP) YES BSP • Publishes highlights of MB meetings on monetary policy 2011: 4.0% + 1 ppt discussions 2012: 4.0% + 1 ppt • Publishes Inflation Report • Releases press statement FORWARD- LOOKING Is inflation PROMOTES forecast in TRANSPARENCY BSP announces inflation target (yearly) line with target? INCREASES ACCOUNTABILITY BSP• Assesses economic conditions BSP• Forecasts inflation • Adjusts policy rates• Conducts monetary policy • Issues Open letter to the COMPREHENSIVE NO President (yearly)
  • 32. How does inflation targeting work?Data disclosure and policy communication • Quarterly inflation report - serves as a monetary policy statement • Press releases at the time of monetary policy decision - done every six weeks • 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.
  • 33. How does inflation targeting work?BSP’s explanation clauses 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
  • 34. How does inflation targeting work?Recent developments in BSP’s ITframework• 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 Inflation target for 2011: 4.0 + 1.0% Inflation target for 2012-2014: 4.0 + 1.0%
  • 35. OUTLINEA. IntroductionB. Inflation and Price StabilityC. Monetary Policy and Inflation TargetingD. Inflation: Recent Trends and Outlook Inflation:E. Contemporary issues in Monetary Policy
  • 36. How has inflation behaved over the years? Headline inflation Year-on- Year-on-year change in percent (2000=100)25 Oil price hike, peso 2010 ave. = 3.8% depreciation, natural calamities (e.g. 2011 YTD ave. = 4.3%20 earthquakes) Inflation Targeting Oil price hike and rise in prices of agri15 Power Asian financial commodities crisis crisis, El Niño Oil Peso price Rice crisis depreciation, oil hike10 price hike RVAT June 2011 4.6%50 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 11-Jan
  • 37. How has inflation performed vis-à-vis targets? vis- Actual Inflation Inflation Target Year (in percent) (in percent)1 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 2.8 4.0 − 5.0 2008 9.3 4.0 ± 1.0 2009 3.2 3.5 ± 1.0 2010 3.8 4.5 ± 1.0 2011 4.3 YTD as of June 4.0 ± 1.0Notes:* For 2002-2004, actual inflationfigures are 1994-based whiledata for 2005-2008 are 2000-based1 Annual target
  • 38. What is the outlook for inflation? inflation?Latest inflation forecasts indicate a manageableinflation environment over the policy horizon. * Source: BSP Inflation Report Q1 2011
  • 39. What is the outlook for inflation?Although inflation pressures have moderatedslightly, the inflation target remains at risk. Upside risks Downside risks• Higher global food and oil • Sustained appreciation of prices the peso• Potential adjustments in • Weaker global recovery domestic rice prices and electricity charges• Potential impact of weather disturbances on agricultural production
  • 40. OUTLINEA. IntroductionB. Inflation and Price StabilityC. Monetary Policy and Inflation TargetingD. Inflation: Recent Trends and Outlook Inflation:E. Contemporary issues in Monetary Policy
  • 41. Multispeed global recoveryTwo-speed global recovery : Emerging and developing market economies to expand by 6.5 percent in 2011 Advanced economies to grow by 2.5 percent Source: IMF World Economic Outlook Update, April 2011
  • 42. Multispeed global recovery• Uncertainty of external demand poses risks to theeconomic outlook• Slow recovery scenario for global growth in the USand other advanced economies given: • Uncertainties in global financial markets • Possible withdrawal of stimulus • Impact of high commodity prices • Possibility of default of some member in the Euro region 42
  • 43. Large capital inflows Drivers in the acceleration of cross-border capital flows: • Brighter growth prospects in emerging market (EM) economies • Accommodative monetary policies in advanced economies (AE) • Yield differentials favoring EMs • Improved risk appetite for EM assetsIMF REO for Asia (Oct, 2010): “growth and strongmacrofundamentals are the driving force behind the inflows;interest rates and yield differentials provide an ancillary role”
  • 44. Large capital inflowsCredit take-up has been moderate, with loan growth at pacewith the expansion in economic activity If current conditions of Liquidity and Bank Lending Jan 2002 – April 2011; in Php billion strong external liquidity continue, these could 5,000 3,000 Domestic Liquidity - lhs add to market volatility 4,500 2,500 4,000 Bank Lending (Net of RRPs) - rhs Managing these flows 3,500 2,000 will test the 3,000 2,500 1,500 effectiveness of central 2,000 bank policies 1,500 1,000 1,000 There is also a risk that 500 500 flow of capital would 0 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 reverse quickly, leading to costly sudden stops
  • 45. Large capital inflowsPolicy toolkit1. Improved monitoring of capital inflows2. Greater exchange rate flexibility3. Reserve accumulation and associated liquidity management operations4. Financial sector reforms to deepen financial markets5. Macroprudential measures to strengthen banking system health6. Reform of the FX regulatory framework to encourage outflows7. Prepayment of external debt8. Careful communication to markets about central bank views/responses9. Calibrations in monetary policy, when necessary
  • 46. Asset price bubblesThe asset price debate: should monetarypolicy try to burst the bubble? The BSP does not actively respond to asset price bubbles But continues to be highly attentive and alert to credit growth, asset price movements and imbalances BSP uses variety of macroprudential instruments to temper asset price escalations
  • 47. Asset price bubbles Limited evidence of stretched asset market valuationsAverage Land Values, Makati CBD and Ortigas Office and Residential Rental ValuesReal Prices, based on rebased CPI Real Prices, based on rebased CPI(in pesos per square meter) (in pesos per square meter per month)120,000 700 Makati Ortigas Residential Rental Values Office Rental Values 600100,000 500 80,000 Q1 2011: Q1 2011: P351/sq.m P83,921/sq.m 400 60,000 300 40,000 200 Q1 2011: Q1 2011: 20,000 P38,782/sq.m P239/sq.m 100 0 0 1Q 01 1Q 02 1Q 03 1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1 Q 09 1 Q 10 1 Q 11 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 2Q 3Q 4Q 1Q 01 1Q 02 1Q 03 1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1 Q 09 1 Q 10 1 Q 11PRICE-EARNINGS (P/E) RATIO EFFECTIVE EXCHANGE RATE INDICES OF THE PESO 23031 Narrow = 171.99 (May 201 1)29 21027 1902523 170 Broad = 136.23 (May 2011 ) May 2011 = 15.3221 15019 1301715 11013 Major Trading Partners = 85.58 (May 2011) 9011 9 70 7 50 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 47
  • 48. Commodity price increase Global Food Price Index and Dubai Crude Oil Prices In Asia, recent bout of 2007 -May 2011 inflation being stoked by Dubai Crude Prices (US$/barrel) FAO Food Price Index (FPI) 140 250 higher costs of food and oil FPI Jun 2008 FPI Apr 2011 235 Escalating prices are 120 224.13 FPI May 2011 200 complicating trade-off 100 232 between keeping a lid on 80 150 prices and sustaining 60 growth 100 Why should we be 40 50 concerned? 20-Erodes purchasing power 0 0 Jul Jul Jul Jul Oct Oct Oct Oct Mar Apr Mar Apr Mar Apr Mar Apr Mar Apr May Nov Dec May Nov Dec May Nov Dec May Nov Dec May Jan 2007 Feb Jun Aug Jan 2008 Feb Jun Aug Jan 2009 Feb Jun Aug Jan 2010 Feb Jun Aug Sep Jan 2011 Feb Sept Sept Sept-Could force policy tightening 48
  • 49. • Share of food to Commodity price increase the consumption basket is higher Country Food Weight than those in Myanmar 68.3 Nepal 53.2 some neighboring Philippines 46.6 countries Sri Lanka 45.5 Country Energy Cambodia 42.7 Weight Mongolia 41.1 (in Papua New Guinea 40.9 percent) Indonesia 36.0Singapore 21.0 Fiji 35.4Indonesia 15.0 Thailand 33.0Thailand 15.0 Malaysia 30.0 China 26.9Malaysia 15.0 Taiwan 26.0China 15.0 Singapore 22.1Korea, Rep 15.0 Brunei Darussalam 17.1India 14.0 India* 14.3Philippines 10.0 Korea, Rep 14.0Taiwan 7.0 *WPISource: Nomura Source: CEIC, official statistic website, and Bloomberg 49
  • 50. Commodity price increaseCompared with neighboring countries, recent Philippinefood inflation is one of the lowest35.0 35.0 Year on year inflation of selected countries Year on year food inflation of selected countries January 2008 – May 2011 January 2008 – May 201130.0 30.0 Indonesia Indonesia25.0 Malaysia Malaysia 25.0 Thailand Thailand20.0 Philippines 20.0 Vietnam Vietnam15.0 Philippines 15.010.0 5.0 10.0 0.0 5.0 Jan-08 Jul-08 Oct-08 Jan-09 Jul-09 Oct-09 Jan-10 Jul-10 Oct-10 Jan-11 Apr-08 Apr-09 Apr-10 Apr-11 -5.0 0.0 Jan-08 Apr-08 Jan-09 Apr-09 Jan-10 Apr-10 Jan-11 Apr-11 Jul-08 Oct-08 Jul-09 Oct-09 Jul-10 Oct-10-10.0 50
  • 51. Commodity price increase Some reasons why food inflation is lower in the Philippines Favorable domestic supply conditions… Timely importation of rice and sugar Recovery of agriculture in Q4 2010 sustained into 2011 …while neighboring countries have faced supply constraints Malaysia: food inflation affected by subsidy rationalization program South Korea: foot and mouth disease affected meat prices Extreme weather conditions in parts of Asia: Country Impact on Food Inflation India Unseasonal rains in some parts of the country disrupted vegetable output Indonesia Extreme weather disrupted harvests and food distribution South Korea Heavy snow and unusually cold weather affected vegetable supply China Cold spring delayed planting and damaged vegetable crops; rising labor costs also pushed up the price of agricultural productsSource: FAO Crop Prospects and Food Situation December 2010
  • 52. Commodity price increase• Well-behaved rice prices • Timely importation of rice augmented by domestic production brought inventory to record levels in recent months • Domestic rice production in Q4 2010 recovered, growing by 21.1 percent compared to -24.8 percent in Q3 • Corn production also recovered by 13.8 percent Country Weight of Rice in CPI BasketPhilippines 9.36India 1.79Indonesia 5.80a/Thailand 2.88b/a/Includes paddy, tubers and their productsb/Refers to weight of rice, flour, and cereal products
  • 53. Commodity price increase Stronger private demand & liquidity growth in some Asian countries compared to relatively moderate growth in PHL PCE Growth (YoY, %) Q1 2010 Q2 2010 Q3 20109.08.07.06.05.04.03.02.01.00.0 Indonesia Thailand Malaysia South Korea India Philippines Source: BloombergGrowth in Liquidity (YoY, %) Q1 2010 Q2 2010 Q3 2010 Q4 201025201510 5 0 I ndonesia Thailand Malaysia South Korea India Philippines ChinaS ource : BloombergData for Indonesia, Thailand and China refer to M2 g rowth rates
  • 54. Commodity Price Increase: Persistent?Upside pressures on IMF Projections for Consumer Pricescommodity pricesexpected to persist in Advanced Emerging and Economies Developing2011 and 2012 due to : Economies strong global demand supply disruptions and 2009 0.1 5.2 sluggish supply 2010 1.6 6.2 response 2011 2.2 6.9Inflation pressures more 2012 1.7 5.3pronounced in emergingand developing countries Source: IMF WEO Update, April 2011 54
  • 55. Financial stabilityFinancial stability dimension of pricestability Price stability: necessary but not sufficient to achieve financial stability Emergence of imbalances even when monetary policy settings appear appropriate Best approach is to involve a portfolio of instruments with macroprudential regulation
  • 56. The BSP’s Conduct of Monetary Policy ZENO RONALD R. ABENOJA Director Economic and Financial Learning Center University of the Philippines Manila 13 July 2011