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Monetary Policy

Monetary Policy - Glossary and Abbreviations

Base Money (BM) – the sum of the reserve money (RM), reserve-eligible government securities, liquidity reserves and reserve deficiency of banks. 1

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

Demand-Pull Factors of Inflation – pressures on inflation caused by relatively higher demand compared to the available supply of goods and services. Usually, when people, business or the government receive more income, realize capital gains or obtain easier access to credits, the overall demand for goods and services may increase. This would lead to increased prices, assuming the supply of goods and services is not able to adjust quickly enough to meet the higher demand. In addition, supply shocks in the economy that, either increase the costs of raw materials or curtail supply or both could result in second-round effects that, in turn, may lead to higher demand-side price pressures. Higher oil and agricultural commodity prices, for instance, may eventually affect the price- and wage-setting behavior of economic agents, which could then lead to second-round price pressures from the demand side.

Explanation Clauses - the predefined set of acceptable circumstances under which an inflation targeting central bank may fail to achieve its inflation target. Such circumstances recognize the fact that there are limits to the effectiveness of monetary policy and that deviations from the inflation target may sometimes occur because of factors beyond the control of the central bank. Under the inflation targeting framework of the BSP, these circumstances include price 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; (d) significant government policy changes that directly affect prices such as changes in the tax structure, incentives and subsidies.

Inflation Rate - the rate of change in the weighted average prices of goods and services typically purchased by consumers. The weights of the goods and services are based on their corresponding share to the Consumer Price Index (CPI) basket, i.e., the standard basket of goods and services purchased by a typical household. In the Philippines, the composition of the CPI basket is determined from the Family Income and Expenditure Survey (FIES) periodically conducted by the National Statistics Office (NSO). Inflation is typically defined as the annual percentage change in the CPI. It indicates how fast or slow the CPI increases or decreases.

  • Headline Inflation – the rate of change in the weighted average prices of all goods and services in the CPI basket.

  • Core Inflation – An alternative measure of inflation that eliminates transitory effects on the CPI, core inflation removes certain components of the CPI basket that are subject to volatile price movements, such as food and energy, and other items affected by supply side factors, the price changes from which are not within the control of monetary policy.

    Official Definition - This refers to the rate of change in the CPI which excludes the following items/ commodity groups: rice, corn, fruits and vegetables, and fuel items (gas, liquefied petroleum gas (LPG), kerosene, gasoline and diesel), which together represent 18.4 percent of the CPI basket. Core inflation data for 2001-2002 are BSP estimates while the data starting January 2003 are the official National Statistics Office (NSO) figures.

    BSP’s Alternative Measures of Core Inflation:
    • Net of Selected Volatile Items - This measure refers to the rate of change in the CPI which excludes the following items/ commodity groups: educational services, fruits and vegetables, personal services, rentals, recreational services, rice, and corn which together represent 37.6 percent of the CPI basket.
    • Trimmed Mean - represents the average inflation of the (weighted) middle 70 percent in a lowest-to-highest ranking of year-on-year inflation rates for all CPI components.
    • Weighted Median - represents the middle inflation (corresponding to a cumulative CPI weight of 50 percent) in a lowest-to-highest ranking of year-on-year inflation rates.


Inflation Expectations – the perceived rate of change, trends and movements of the prices of goods and services in the economy. Measures of inflation expectations include survey-based consumer and business expectations of inflation and inflation forecasts of private analysts, among others.

Inflation Target – level of inflation which the BSP aims to achieve over a given period under the inflation targeting framework. The government’s inflation target is an annual target, currently expressed in terms of a point target (with a tolerance interval of ± 1 percentage point) and is set jointly by the BSP and the government through an inter-agency body, the Development Budget Coordination Committee (DBCC), although the responsibility of, and accountability in, achieving the target rests primarily on the BSP.

Inflation Targeting (IT) – a framework for monetary policy that focuses mainly on achieving price stability as the ultimate objective of monetary policy. The IT approach entails the announcement of an explicit inflation target that the monetary authority promises to achieve over a policy horizon of two years.

Interest Rates – the cost of borrowing money or the amount paid for lending money expressed as a percentage of the principal.

Interest Rate Differential - the difference or margin between interest rates such as the difference between domestic and foreign interest rates.

M1 or Narrow Money – consists of currency in circulation (or currency outside depository corporations) and peso demand deposits.

M2 or Broad Money – consists of M1 plus peso savings and time deposits.

M3 or Broad Money Liabilities – consists of M2 plus peso deposit substitutes, such as promissory notes and commercial papers (i.e., securities other than shares included in broad money).

M4 - consists of M3 plus transferable and other deposits in foreign currency.

Monetary Aggregate Targeting – an approach to monetary policy whereby the central bank adjusts its monetary policy instruments to control the level of monetary aggregates. This approach is based on the assumption that there is a stable and predictable relationship between money on the one hand, and output and inflation on the other hand. This means that the reaction of inflation to changes in money supply is stable over time and is, therefore, predictable. The approach assumes that the monetary authority is able to determine the level of money supply that is needed given the desired level of inflation that is consistent with the economy's growth objective. In effect, the monetary authority influences inflation indirectly by targeting the money supply.

Monetary Policy – measures or actions taken by the central bank to influence the general price level and the level of liquidity 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, for the main objective of stabilizing the price level.

    • Expansionary Monetary Policy – monetary policy setting that intends to increase the level of liquidity/money supply in the economy and which could also result in a relatively higher inflation path for the economy. Examples are the lowering of policy interest rates and the reduction in reserve requirements. Expansionary monetary policy tends to encourage economic activity as more funds are made available for lending by banks. This, in turn, increases aggregate demand which could eventually fuel inflation pressures in the domestic economy.
    • Contractionary Monetary Policy - monetary policy setting that intends to decrease the level of liquidity/money supply in the economy and which could also result in a relatively lower inflation path for the economy. Examples of this are increases in policy interest rates and reserve requirements. Contractionary monetary policy tends to limit economic activity as less funds are made available for lending by banks. This, in turn, lowers aggregate demand which could eventually temper inflation pressures in the domestic economy.


Liquidity reserves - refers to the option given to banks in complying with the reserve requirement, whereby bonds deposited in the reserve deposit account (RDA) facility are considered as compliance with the reserve requirement. 2

Monetary Policy Instruments –the various instruments used by the BSP to achieve the desired level of money supply. These include (a) raising/reducing the BSP's policy interest rates; (b) increasing/decreasing the reserve requirement; (c) encouraging/discouraging deposits in the special deposit account (SDA) facility by banks and trust entities of BSP-supervised financial institutions; (d) increasing/decreasing its rediscount rate on loans extended to banking institutions on a short-term basis against eligible collaterals of banks’ borrowers; and (e) outright sales/purchases of the BSP’s holdings of government securities. The BSP’s primary monetary policy instruments are the overnight reverse repurchase (borrowing) rate and the overnight repurchase (lending) rate.

Moral Suasion – the influence which the central bank exercises to induce or convince banks to conduct operations in a manner that would contribute to the attainment of monetary goals but not necessarily support the profit-maximizing objectives of the banks.

Open Market Operations (OMO) – the sale or purchase of government securities by the BSP to withdraw liquidity from or inject liquidity into the system.

Quasi-money – the sum of savings and time deposits

Rediscounting – a special refinancing facility of central banks wherein a financial institution borrows money from the BSP using promissory notes and other loan papers of its borrowers as collateral

Repurchase (RP) Rate - the policy interest rate at which the BSP lends to banks with government securities as collateral

Reserve Deposit Account (RDA) – The reserve deposit account (RDA) is a deposit facility with the BSP designed to facilitate the adoption of the change in the banks’ mode of compliance with the liquidity reserve requirement, pursuant to Circular No. 539 which became effective on 25 August 2006. The liquidity reserve requirement consisted of market-yielding government securities purchased directly from the BSP. The RDA, which eventually replaced government securities as a form of compliance with the liquidity reserves, allows banks to keep a portion of their reserves in the form of a three-month term deposit in the RDA maintained with the BSP. The Treasury Department also has the option of offering RDA with 6-and 12-month tenors, with interest rate at one-half percent (1/2%) below the prevailing market rate for comparable government securities. Pre-termination of RDAs is allowed, subject to a reduction in applicable interest rates, as prescribed by the Treasury Department.

Reserve Money (RM) – the sum of currency in circulation and reserves of banks which include cash in banks’ vault and reserve balances or deposits with the BSP including banks’ balances under the reserve deposit account (RDA).

Reserve Requirement – refers to the proportion of banks’ deposits and deposit substitute liabilities that banks are required to hold as reserves

Regular (statutory) reserves - pertain to the proportion of deposits and deposit substitute liabilities, which must be held as deposits with the BSP in part, with the remaining balance allowed to be kept in banks' vaults as cash or as reserve-eligible government securities

Regular Reserves – the proportion of deposits and deposit substitute liabilities, a certain fixed portion of which must be held as deposits with the BSP, with the balance kept in banks’ vaults as cash or eligible reserves.


Reverse Repurchase (RRP) Rate – the policy interest rate at which the BSP borrows from banks with government securities as collateral.

Special Deposit Accounts – Fixed-term deposits by banks and trust entities of BSP-supervised financial institutions with the BSP. These deposits were introduced in November 1998 to expand the BSP's toolkit for liquidity management. In April 2007, the BSP expanded the access to the SDA facility to allow trust entities of financial institutions under BSP supervision to deposit in the facility.

Supply Shocks to Inflation – pressures on inflation resulting from shortages in supply and increases in the cost of production without a corresponding expansion in output. Examples of these are bad weather, natural calamities and disasters; wage increases not matched by higher productivity of labor; hikes in international oil prices; increases in prices of imported raw materials; and hikes in rental rates. These tend to limit or decrease supply, and, assuming no decline in demand for goods and services, push prices up. (Conversely, an oversupply of commodities tends to induce the opposite effect on prices.)

Transmission Mechanism of Monetary Policy – process by which monetary policy actions affect economic and financial variables. This mechanism describes the various channels, as well as the length of time, through which monetary policy actions affect the real economy, particularly inflation and output.

Treasury Bill Rate – the yield on short-term debt instruments issued by the National Government (NG) (the primary market) for the purpose of generating funds. Treasury bills come in maturities of 91, 182 and 364 day


1 Liquidity reserves now take the form of deposits with RDA, which in turn is already counted as part of Reserve Money.

2 Originally, these consisted of market-yielding GS purchased directly from the BSP under Circular No. 10 dated 29 December 1993.