COLLEGE OF BUSINESS AND ACCOUNTANCY

COURSE DESCRIPTION:
 FM7x / FM2x – Financial Markets

TOPIC:
 Central Banking and Monetary Policy

MODULE CODE:
 FM 02

LEARNING OUTCOMES:
At the end of this module, the student should be able to:
 Elaborate the role of BSP in the economic development. of the Philippines;
 Explain the monetary policy and its role in the economic development of the country;
 Illustrate how the tools of monetary policy are used to influence money supply and interest rates.

BIBLICAL VALUES INTEGRATION:

“And our hope of you is steadfast, knowing, that as you are partakers of the sufferings, so shall you be also of the
consolation.”
-2 Corinthians 1:7

INTRODUCTION:
Finance has become one of the most international of industries, with major banks spreading their activities
across numerous countries and continents, yet regulation still takes place on a national or even more local basis. When
banks run into trouble, it's unclear who is supposed to help or how. The favored solution so far, direct government
intervention, like the $700 billion rescue package approved by the U.S. Congress or the British plan, isn't an option
everywhere.

Banks have become so big and so leveraged that their balance sheets can exceed the gross domestic product of
the country in which they are based. That's the case in Belgium, the Netherlands and a host of smaller coun-tries,
including Iceland, where on Oct. 6 the Prime Minister warned about the possibility of a "national bankruptcy" because
several banks with assets larger than the country's entire economy ran into trouble. Uncertainties about crisis
management efforts are contributing significantly to the market instability.

BODY:
The Confidence on Money
The BSP is the only authorized government entity to print money and is responsible for the proper
administration of the monetary banking credit system of the republic to achieve monetary stability and create
conditions conducive to economic development. As such, it preserves the confidence of the people in money as a thing
of value and essential institution of the economic system. Once the trust is broken, money ceases to function as it should
be, i.e., as a vehicle of economic activities and pillar of the price system.

What are some instances of monetary management by monetary authorities that can cause people to lose
confidence in money and what are the probable effects?

One example is the unrestrained growth in money supply which causes severe inflation and distorts
investments, production, and employment. In this case, money tends to lose value and people prefer to tie up with
rapidly appreciating but non-productive assets in real forms like jewelry and idle lands.

Holding on instead even to interest-earning money simply allows inflation to erode its value. As a result, less
money is made available for investment, production and employment to acquire non-productive consumption
spending.

Characteristics of a Central Bank

Central banks all over the world share a major characteristics. The following are the most important.
1. Publicly-owned. There are varieties of ownership patterns for central banks, but government ownership is a
common factor. The Central Bank of the Philippines is fully owned and controlled by the government. This is

Page 1 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

 likewise the case with many central banks founded after the Second World War when many countries became
politically independent.

The older central banks are evolved private institutions, which either developed into publicly controlled banks
or have retained their private character. There are still a few examples of central banks which are partly
privately owned, those in Belgium, Switzerland and Japan. The Bank of England evolved from a private profit-
oriented bank. The U.S. central bank called the Federal Reserve System as a "system of 12 regional federal
reserve banks." The Federal Reserve Banks are owned by private commercial banks, which are members of the
Federal Reserve System. In spite of this, the U.S. government exerts a large influence on the system.

The members of the Boards of the Governors, the central monetary authority for the country, are appointed by
the US government and in turn this Board appoints the directors of the Federal Reserve Banks. Based on this,
the formal structure of ownership need not affect the essential operations of central banking and monetary
policy. What is important is that central banks today operate for a public purpose. They are not there to earn a
profit.

2. Bank of currency issues and ultimate source of money. All central banks perform the note issue function for
the country. The notes are regulated in their supply by the government, which may be represented by the
monetary authority or by the requirements of the budget. In theory, however, the central bank can provide all
the money the government requires.

The Philippine Central Bank prints and mints the coinage. More significant than the note issue function is the
central bank's role as the ultimate provider of cash. This depends on the willingness of the community to accept
all notes and checks drawn on the central bank. The general public will accept such checks because the
commercial banks will credit the proceeds to the depositor's account

3. Banker's Bank. The old central banks evolved partly from the need for some institution to become a bank for
bankers. All central banks perform this function of servicing other banks. This includes such activities as
maintaining accounts for other commercial banks - in fact, the other banks are required to do so, if only to
deposit their reserves with the central bank.

4. Custodian of the country's reserves of foreign currencies. Central banks naturally serve as the keeper of the
country's reserve of international currencies. The function of being custodian of international reserves evolved
from the note issue function and that of keeping the reserves of other banks.

In the days of metallic currency systems such as the gold standard, the central bank kept the metallic reserves
in order to meet the possibility of converting paper notes into metallic equivalent on demand. And in the case
of international trade, the metallic currency holdings served also as a reserve. With other banks placing their
reserves in the central bank, the centralization of the monetary reserves followed.
In the domestic sector, a central bank may not be hampered by lack of cash since it can always issue new
money. With respect lo international payments, the resident of another country require another currency
acceptable to them. So, this function of keeping foreign currencies is significant.

In the Philippines, reserves are traditionally held in U.S, dollars. Other currencies are the euro, the Swiss francs
and the Japanese yen while the British pound has found its level among the major currencies. There is also a
growing use of what are known as SDRs or special drawing rights. Nevertheless, the world payment is still
basically the U.S. dollar and most governments keep their reserves in this currency.

From this function of keeping the international reserves, restrictions on foreign exchange payments have some
time been exercised by central banks. To conserve the foreign exchange reserves, the central bank normally
keeps this foreign exchange in other banks abroad, normally earning interest.

5. Regulation of monetary and financial activities. Most central banks are given the authority to regulate the
operations of all banks and other financial institutions in the country. This includes the supervision of banks
and other financial institutions to assure their solvency and to protect the general public.

Among their duties related to this are the regulation of the condition for the establishment of new banks and
the prescription of qualifications for bank officers and directors; the determination of the activities they can
engage in; and the conditions for deposit-taking and loan-giving.

Page 2 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

 In general, these functions are inherent in the role given to the central bank as the principal institution of the
monetary and financial basis of the economy.

BANGKO SENTRAL NG PILIPINAS (BSP)

BSP is principally an institution designed to regulate the monetary and financial systems. It normally has a
policy board which serves as the monetary authority. The BSP provides the staff to supervise and implement the
policies enunciated by the monetary authority. The BSP plays a vital role in the growth and development of the country.
It can achieve its objectives and regulate monetary and credit conditions of the country through effective use of its
monetary tools.

The Bangko Sentral ng Pilipinas (BSP) was created by R.A. 7653, otherwise known as The New Central Bank
Act, which was passed by the House of Representatives and the Senate on June 10, 1993. It was signed into law on June
14, 1993 and became operational on July 3, 1993.

Sec. 2 of said Act states that "There is hereby established an independent central monetary authority, which
shall be known as the Bangko Sentral ng Pilipinas." While there had been an existing Central Bank of the Philippines
which was established in 1949 by virtue of R.A. 265, the new constitution which was ratified in 1986 had, in one of its
provisions, the "creation of an independent Central Monetary Authority which shall provide policy directions in the
areas of money, banking, and credit and which shall have supervision over the operations of the banks and exercise
such regulatory powers that may be provided by the law over the operations of finance companies and other
institutions performing similar functions." The objectives of the BSP are to maintain price stability and promote and
maintain monetary stability and convertibility of the peso.

The capital of the BSP shall be 50 billion pesos to be fully subscribed by the government of which 10 billion
pesos was fully paid upon effectivity of R.A. 7653.

RESPONSIBILITIES AND PRIMARY OBJECTIVES

The Bangko Sentral shall provide policy direction in the areas of money, banking and credit. It shall have
supervision over the operations of banks and exercise such regulatory powers as provided in R.A. 7653 and other
pertinent laws over operations of finance companies and non-bank financial institutions performing quasi-banking
functions, hereafter referred to as quasi-banks. At the helm of the Philippine Financial System is the Bangko Sentral ng
Pilipinas (BSP). It provides policy directions in the areas of money, banking and credit in the country. It has supervision
over the operations of banks and exercise regulatory powers over the operations of non-bank financial institutions
performing quasi-functions.

The Objectives of the BSP under RA 7653 are:

1. To maintain price stability conducive to a balanced and sustainable growth of the economy.
2. To promote and maintain monetary stability and the convertibility of peso.
BSP stands ready to support activities that serve to strengthen the country's commercial linkages with the world
economy by:
1. Helping create a stable financial environment
2. Promoting liberal foreign exchange rules, and
3. Enhancing access to local and foreign capital to support investment.

THE MONETARY BOARD

The powers and function of the Bangko Sentral shall be exercised by the Monetary Board, composed of seven
members appoint. ed by the President of the Philippines for a term of six years.

The seven members are:

a. The Governor, who shall be the Chairman of the Monetary Board. The Governor of the Bangko Sentral shall be
subject to the confirmation by the Commission of Appointments.
b. A member of the Cabinet to be designated by the President of the Philippines.
c. Five member who shall come from the private sector, all whom shall serve full time.
Qualifications:
The members of the Monetary Board must be natural born citizen of the Philippines, at least 35 years of age,
with the exception of the Governor who shall be at least 40 years of age, of good moral character of unquestionable
integrity, of known recognized competence in social and economic disciplines

Exercise of Authority
Page 3 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

 The Monetary Board shall 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 are reported to the President and the Congress within 15 days from the date of their issuance, direct
the management operation and administration of the Bangko Sentral, reorganize its personnel, and issue such rules and
Regulations as may be deemed necessary or convenient for this purpose. The legal units of the BSP, who are under the
exclusive supervision and control of the Monetary Board, shall establish a human resource management system which
shall govern the selection, hiring appointment, transfer, promotion, or dismissal of all personnel.

The Governor is the Chief Executive Officer of the Bangko Sentral in all dealings with other offices, agencies
and instrumentalities of the government and all other persons or entities, public or private, whether domestic, foreign
or international. The Governor is also empowered to sign notes and securities issued by the Bangko Sentral, all report
balance sheets, profit and loss statement, correspondence and other documents of the Bangko Sentral.

GUIDING PRINCIPLES OF MONETARY ADMINISTRATION

A. Domestic-Monetary Stabilization
The Monetary Board shall endeavor to control any expansion or contraction in monetary aggregates which is
prejudicial to the attainment or maintenance of price stability.

B. International Monetary Stabilization

The Bangko Sentral shall exercise its power to preserve the international value of the peso and to maintain its
convertibility into other freely convertible currency primarily for, although not necessarily limited to, current payments
of foreign trade and invisibles.

Actions When the International Stability of the Peso Is Threatened

Whenever the international reserve of the BS falls to a level the Monetary Board considers inadequate to meet
the prospective net demands on the Bangko Sentral foreign currencies or whenever the international reserve appears
to be in imminent danger of failing to such level or whenever the international reserve is falling as a result of payments
or remittances abroad which in the opinion of the Monetary Board, are contrary to the National welfare, the Monetary
Board shall:
A. take such remedial measures as are appropriate and within the powers granted to the Monetary Board and
Bangko Sentral under the provision of this act.
B. Submit to the President of the Philippines and to Congress a detailed report which shall include, as a minimum,
a description and analysis of:
1. the nature and causes of existing or imminent decline:
2. the remedial measures already taken or to be taken by the Monetary Board:
3. the Monetary Board, fiscal or administrative measures further proposed; and
4. the character and extent of cooperation required from government agencies for the successful execution of
policies of the Monetary Board.
If the resultant action fails to check the deterioration of the reserve position of the Bangko Sentral, or if the
deterioration cannot be checked except by the chronic restrictions on exchange and trade transaction or by a sacrifice
of the domestic growth of the economy, Monetary Board shall propose to the President with appropriate notice to the
Congress, such additional action as it deems necessary to restore equilibrium in the international balance of payments
of the Philippines

MONETARY POLICY
Monetary policy refers to the manipulation of money supply to affect the economy of a country as a whole. It
largely impacts interest rates. Increases in the money supply lower short-term interest rates and will encourage
investments and consumption. On the long run, however, an abundance of money supply leads to increased prices or
inflation and is undesirable. This is where BS plays its role as the balancer. Generally speaking, expansionary monetary
policies and contractionary monetary policies involve changing the level of the money supply in a country.
Expansionary monetary policy is simply a policy which expands (increases) the supply of money, whereas
contractionary monetary policy contracts (decreases) the supply of a country's currency. Money supply is the total of
currency and coins and demand deposits in the economy.

Moffatt (2016) discussed the effects of monetary policy in his article "What Effects Does Monetary Policy
Have?" Expansionary monetary policy that increases the money supply causes an increase in bond prices and a
reduction in interest rates. Lower interest rates lead to higher levels of capital investment. They make domestic bonds
less attractive, so the demand for domestic bonds falls and the demand for foreign bonds rises. All else being equal, a
larger money supply lowers market interest rates. Conversely, smaller money supplies tend to raise market interest
rates.
When central bank wishes to increase money supply, it can do a combination of three things:
Page 4 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

 1. Purchase securities in the open market, known as open market operations.
2. Lower the government discount rate.
3. Lower reserve requirement on banks.
These directly impact the interest rate. When the national treasury buys securities in the open market, the
price of those securities rises. Bond prices and interest rates are inversely related. Government discount rate is an
interest rate, so lowering it is essentially lowering interest rates. If the national treasury decides instead to lower
reserve requirements, this will cause banks to have an increase in the amount of money they can invest or lend. This
causes the price of investments such as bonds to rise, so interest rates must fall. No matter what tool the central bank
uses to expand the money supply, interest rates will decline and bond prices will rise. Increases in bond prices will
affect the exchange market.

Assuming an increase in Philippine bond prices, investors would want sell those bonds in exchange for other
lower-priced bonds. Investors will sell the Philippine bonds because they will receive higher proceeds. So an investor
will sell his Philippine bond, exchange his peso for dollar, and buy a US bond. This causes the supply of peso in foreign
exchange markets to increase and the supply of dollar in the foreign exchange markets to decrease. This will cause peso
to become less valuable relative to the dollar, The lower exchange rate makes Philippine-produced goods cheaper in the
US and US-produced goods more expensive in the Philippines.

Therefore, exports will increase and imports will decrease causing the balance of trade to increase. When
interest rates are lower, the cost of financing capital projects is less. So all else being equal, lower interest rates lead to
higher rates of capital investment.

We can observe the following relative to contractionary monetary policy:

1. Contractionary monetary policy causes an increase in bond prices and a reduction in interest rates.
2. Lower interest rates lead to higher levels of capital investment
3. The lower interest rates make domestic bonds less attractive, so the demand domestic bonds falls and the
demand for foreign bonds rises.
4. The demand for domestic currency falls and the demand for foreign currency ri causing a decrease in the
exchange rate. The value of the domestic currency is r lower relative to foreign currencies.
5. Lower exchange rate causes exports to increase, imports to decrease, and bala of trade to increase.
The effects of a contractionary monetary policy are precisely the opposite of an expansionary monetary policy.
When the central bank wishes to decrease money supply, it can do a combination of three things:
1. Sell securities in the open market, known as open market operations.
2. Raise the discount rate.
3. Raise the reserve requirements.
These cause interest rates to rise, either directly or through the increase in the supply of bonds in the open
market through sales by the national treasury or by banks. This increase in supply of bonds reduces the price for bonds.
These bonds will be bought by foreign investors, so the demand for domestic currency will rise and the demand for
foreign currency will fall.

Thus, the domestic currency will appreciate in value relative to the foreign currency. The higher exchange rate
makes domestically produced goods more expensive in foreign markets and foreign goods cheaper in the domestic
market. Since this causes more foreign goods to be sold domestically and less domestic goods sold abroad, the balance
of trade decreases. The interest rates cause the cost of financing capital projects to go higher, so capital investment will
be reduced.

We can observe the following relative to contractionary monetary policy:

1. Contractionary monetary policy causes a decrease in bond prices and an increase in interest rates.
2. Higher interest rates lead to lower levels of capital investment.
3. Higher interest rates make domestic bonds more attractive, so the demand for domestic bonds rises and the
demand for foreign bonds falls.
4. The demand for domestic currency rises and the demand for foreign currency falls, causing an increase in the
exchange rate. The value of the domestic currency is higher relative to foreign currencies.
5. Higher exchange rate causes exports to decrease, imports to increase, and balance of trade to decrease

The highlights of the meeting of the Monetary Board on monetary policy stance held on 15 December 2022 include
the following (source: BSP.gov.ph):

I. Monetary Policy Decision

The Monetary Board decided to:
a. Raise the BSP’s current policy interest rate by 50 basis points to 5.50 percent for the overnight RRP rate; and
Page 5 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

 b. Increase the current interest rates on the overnight deposit facility (ODF) to 5.0 percent and overnight lending
facility (OLF) to 6.0 percent.

II. Key Considerations in the Formulation of the Monetary Policy Stance

• The latest baseline inflation forecasts continue to show an above-target inflation path over the policy horizon.
The updated forecast path shows inflation peaking in December 2022. From there, inflation is seen to
decelerate but remain elevated well into the first half of 2023. By Q3 2023, inflation will likely revert to within
the 2-4 percent target band before settling close to the lower end of the target range in Q4 2023 and Q1 2024,
largely due to base effects. Thereafter, inflation will stabilize and return to the midpoint of the target by Q2
2024.

• The Monetary Board noted that, at present, inflation remains high and broad-based, as seen in the sharp
increase in core inflation and the further rise in inflation expectations.

• Meanwhile, the risks to the inflation outlook are strongly tilted to the upside in 2023 but remain broadly
balanced for 2024.

• Amid broad-based inflation pressures, persistent upside risks to inflation, and elevated inflation expectations,
the Monetary Board deemed it necessary to take aggressive monetary action to bring headline inflation back
to within target as soon as possible. Continued monetary tightening will also provide a cushion against
external spillovers even as major central banks have signaled a possible slowing down of monetary policy
tightening.

• To mitigate the effects of persistent supply-side pressures on commodity prices, the Monetary Board also
noted the continuing need for timely nonmonetary interventions by the National Government in alleviating
supplyside shortages and strengthening farm productivity.

III. Recent Developments and Inflation Outlook

The Monetary Board considered the recent macroeconomic and financial developments discussed below in
assessing the monetary policy stance:

A. Domestic price conditions

• Headline inflation increased further to 8.0 percent year-on-year (y-o-y) in November 2022 from 7.7 percent in
October 2022, the highest recorded rate since November 2008. The rise in inflation in November 2022 was
due primarily to higher inflation for food and non-alcoholic beverages. Inflation for rice, fruits, sugar, and
vegetables also registered larger increases. Under non-food items, restaurants and accommodation services
also contributed to the further uptick in inflation. The resulting year-to-date average inflation of 5.6 percent
was above the NG’s average inflation target range of 2-4 percent for the year.

• Likewise, core inflation, which depicts underlying demand-side pressures, rose to 6.5 percent in November
2022 from 5.9 percent in October 2022. The higher official core inflation reflected rising food costs, which
have driven inflation for other large-weighted CPI items such as other food and non-alcoholic beverages as
well as restaurants and accommodation services.

B. Inflation expectations
• Inflation expectations also rose further. The BSP’s survey of private sector economists for December 2022
showed higher mean inflation forecasts for 2022 at 5.9 percent (from 5.7 percent based on the November
2022 survey) and for 2023 at 5.1 percent (from 4.9 percent).

• Similarly, the results of the BSP’s Q4 2022 expectations survey on businesses and households indicate that
both sectors anticipate inflation to breach the upper end of the government’s 2-4 percent target range for
2022 and 2023.

C. Inflation outlook
• The latest baseline forecasts continue to show an above-target inflation path, with average headline
inflation seen at 5.8 percent for 2022 and at 4.5 percent for 2023 before decelerating towards the midpoint

Page 6 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

 of the target range at 2.8 percent for 2024. The forecast for 2022 is unchanged, while that for 2023 has been
raised due to the higher-than expected inflation outturn in November, the higher inflation nowcast for
December, and the approved water rate increases starting 2023. The impact of these factors was partly
offset by the lower crude oil price assumption and the peso appreciation. Meanwhile, the lower forecast for
2024 could be attributed to the further easing in oil prices, the peso appreciation, and lower domestic
growth outlook following the cumulative policy rate adjustments of the BSP.

• The risks to the inflation outlook remain strongly tilted to the upside in 2023 but broadly balanced
for 2024. The expected upside risks to inflation over the policy horizon stem mainly from elevated
international food prices due to high fertilizer prices and supply chain constraints. On the domestic front,
trade restrictions, increased prices of fruits and vegetables due to weather disturbances, higher sugar prices,
pending petitions for transport fare increases, as well as potential wage adjustments in 2023 could push
inflation upwards. Meanwhile, the impact of a weaker-than-expected global recovery continues to be the
primary downside risk to the outlook.

D. Demand conditions

• The Philippine economy is expected to remain on a recovery path over the near term. GDP growth is projected
to settle within the DBCC’s targets for 2022 and 2023, but slightly below the 6.5-8.0 percent target for 2024.
The slower growth is mainly due to the lower global GDP growth assumption for 2023 and the impact of the
policy rate adjustments of the BSP.

• Domestic labor market conditions continued to show overall improvement, with the unemployment rate
declining to 4.5 percent in October 2022 from 5.0 percent and 7.4 percent a month ago and a year ago,
respectively.

E. Supply-side indicators

Developments in Agriculture
• Nationwide average retail rice prices increased in November 2022 based on the results of the 2018-based PSA
Retail Price Survey (RPS) covering all provinces and key cities in the country. The uptick in average rice prices
in November 2022 was attributed to the lingering impact of agricultural damages and losses left by strong
typhoons that hit the country during the main harvest season.

• Prices of key food items have risen as lingering supply-side issues and spillover effects of the Russia-
Ukraine conflict have led to persistent global supply chain bottlenecks and soaring prices of fuel, feeds, and
fertilizers. Likewise, the country’s vulnerability to natural calamities and animal diseases continue to weigh
on agricultural production. To cushion the impact of these challenges on the country’s food security, the
National Government has implemented crucial non-monetary measures to fill short-term supply gaps (e.g.,
temporary reduction of tariff rates and timebound increase in import volumes and expansion of import
sources) and boost local production (e.g., longer-term productivity-enhancing programs).

• Based on the latest assessment as of 10 November 2022, prevailing La Niñ a conditions will likely persist
through February 2023 and then transition to ENSO-neutral conditions by February-March-April 2023
season. Nonetheless, continuing La Niñ a conditions may pose the risk of more frequent tropical cyclones and
sustained flooding, which could adversely affect the agriculture sector, as well as present upside pressures on
inflation. On the other hand, above-normal rainfall conditions associated with La Niñ a may also boost water
supply in harvest areas and thus potentially enhance agricultural production.

Oil Price Developments

• Global crude oil prices declined amid worries over weakening demand due to restrictive financial conditions,
slowing global growth, and reduced demand from China. As such, futures prices of Brent crude oil remained in
backwardation. Meanwhile, as of November 2022, the US Energy Information Administration (EIA) expects
global supply and demand in oil markets to be generally balanced in 2023, although possible additional
production cuts from OPEC+ and increased global economic uncertainty pose significant risks to the EIA’s
outlook.

Page 7 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

 • Domestic pump prices for gasoline, kerosene, and diesel have declined in recent weeks. However, on a year-
to-date basis, prices of gasoline, kerosene, and diesel remained significantly higher compared to end-2021
levels.

Developments in the Utilities Sector

• The overall electricity rate increased in December 2022 due to the completion of distribution-related refunds
for residential customers. Three (3) such refunds are still ongoing, which are expected to be completed by
December 2022, January 2023, and May 2023.

• Meanwhile, the increase in electricity rates was tempered by the decline in generation charges. Charges from
Power Supply Agreements (PSAs) fell as the First Natgas-San Gabriel plant went back online after its
scheduled maintenance outage in October. The recent appreciation of the peso against the US dollar also
contributed to the reduction in cost. Similarly, cost of electricity from the Wholesale Electricity Spot Market
(WESM) decreased on improved supply conditions in the Luzon grid.

F. Financial market developments

• The peso depreciation against the US dollar slowed down to 9.8 percent year-to-date as of 29 November 2022,
from 12.0 percent in October. The peso appreciated on positive market sentiment in November amid
lowerthan-expected US inflation in October, which fueled optimism that the US Federal Reserve could slow its
pace of rate increases, and the decline in global oil prices. On the domestic front, optimism over releases of
positive news, specifically, higher gross international reserves (GIR) for October; the lower unemployment
rate for September; higher-than-expected GDP growth in Q3 2022; the rise in overseas Filipino (OF)
remittances in September; improvement in balance of payments (BOP) data in October; and the reinstatement
of investment grade rating for the Philippines by S&P likewise contributed to the appreciation of the peso.

• The Philippine Stock Exchange Index (PSEi) averaged 6,388.9 index points in November, higher by 6.6 percent
than its October average. The recovery in the benchmark index could be attributed to improved market
sentiment following positive developments in the domestic economy, including: faster-than-expected Q3 2022
GDP growth of 7.6 percent; positive third-quarter corporate earnings reports; and S&P Global Ratings’
affirmation of the Philippines’ investment-grade credit rating of BBB+ with a stable outlook. Against this
backdrop, there was market optimism on the economy’s ability to absorb the 75-bp rate increase by the BSP
at its November policy meeting. Market expectations of a slower pace of monetary policy tightening by the US
Federal Reserve also contributed to renewed investor confidence.

G. Domestic liquidity and credit conditions

• Domestic liquidity and credit conditions continued to support bank lending and broad-based economic
recovery. Preliminary data show that domestic liquidity (M3) grew by 5.4 percent year-on-year to about ₱15.4
trillion in October from 5.2 percent in September. Meanwhile, outstanding loans of universal and commercial
banks for both production and consumption activities increased by 12.5 percent in October (from 12.3
percent in September) and 22.6 percent (from 20.6 percent), respectively.

• Secondary market government security yields, especially in the middle of the yield curve, declined on 5
December 2022. Yields fell as banks serviced their client requirements and reinvested their excess funds. The
decline in yields at the belly of the curve was also supported by market expectations that the BSP could also
move to a slower pace of policy rate increases amid signals from the US Federal Reserve that it could slow the
pace of its upcoming rate increases.

H. Fiscal developments

• Fiscal consolidation continued as the National Government (NG) recorded a deficit of P1,1111.8 billion for
January - October 2022, 7.6 percent lower than recorded in the same period in 2021. Netting out the interest
payments, the primary deficit amounted to P678.7 billion, 18.5 percent lower than the amount recorded in
2021.

Page 8 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

I. External developments

• Global economic activity contracted faster in November due to further declines in manufacturing output and
service sector revenues amid a broad slump in business activity in major economies such as the United States,
the Euro Area, United Kingdom, Japan, China, and Brazil.

• Global economic output contracts for the fourth consecutive month amid a broad slowdown in business
activity. The JP Morgan All-Industry Output Index fell further to 48.0 in November from 49.0 in October,
reflecting the contractions in output, new business, new export business, and outstanding business. Although
price pressures have eased amid the decline in input costs and selling charges, businesses recorded lower
revenues as rising interest rates, prolonged geopolitical risks, elevated inflation, and heightened market
volatility weighed on private demand. Nonetheless, the global economy's rate of contraction was partially
offset by the faster expansion in India.

• Amid major central banks’ aggressive monetary policy tightening, global financial conditions have also
continued to tighten. Several central banks have raised their respective key policy rates in November to
address persistent and broadening price pressures as well as to anchor inflation expectations.

BSP uses several tools to implement its monetary policies other than controlling interest rates. Among these
tools are its open market operations (buying and selling government securities), reserve requirements on banks,
discount rate, credit control, money supply, etc. Monetary policy seeks to influence either the demand for or supply of
excess reserves resulting from the implementation of monetary policy triggering a sequence of events that affect such
economic factors as short-term interest rates, long-term interest rates, foreign exchange rates, the amount of money
and credit in the economy, and the levels of employment, output, and prices.

Depository institutions trade excess reserves held at the central bank among themselves. Those with excess
reserves earn by lending them to banks with deficit as explained under interbank call loan. The rate of interest on these
interbank transactions becomes a benchmark interest rate to guide monetary policy. This rate is a function of the
supply and demand for central bank funds among banks and the effects of the central bank trading in its open market
operations.

The open market operations of BS influence money supply because when it sells securities, it siphons off the
funds or money supply in the economy, thereby decreasing money supply. When it buys back securities, it gives back to
the economy the money supply.

When BSP increases the reserve requirement on banks, it reduces the amount available to banks for lending to
borrowers, thus limiting the credit and ultimately the money supply. When this reserve requirement is lowered, loans
that banks can grant are increased ultimately increasing the money supply.

Monetary policy works largely through its impact on interest rates. Increases in money supply lower interest
rates, which stimulate demand. As money supply increases, investors will be encouraged to buy more securities (stocks
or bonds) forcing securities prices up and interest rates down. In the long run, investors may increase their holdings of
securities and ultimately buy tangible assets, which stimulate consumption demand directly.

In implementing monetary policy, BSP can take one of two basic approaches to affect the market for bank excess
reserves:
1. Target the quantity of reserves in the market based on BS's open market operations' objectives for growth in
the monetary base (the sum of money in circulation and reserves) and in turn, the money supply; or
2. Target the interest rate on those reserves that BSP is granting.

The approach taken varies according to the need to combat inflation and the desire to encourage sustainable
economic growth.

REFERENCES:
Page 9 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022

Mariano, N.L. (2014).Elements of Finance. Rex bookstore Inc.

Mariano, N.L. (2017). Capital Markets. Rex bookstore, Inc.

Bsp.gov.ph
-------------------------------------------------------------NOTHING FOLLOWS---------------------------------------------------------------

Page 10 of 10

GEN-FM-019 Rev 1 Effective 30 Sept 2022