The Bangko Sentral ng Pilipinas (BSP) is formally adopting inflation targeting as the framework for monetary policy beginning January 2002. Under the new framework, the BSP will be committed to achieve the Government’s average annual inflation target of 5.0-6.0 percent for 2002 and 4.5-5.5 percent for 2003. These targets have been set in coordination with the Development Budget and Coordination Committee consisting of the Department of Finance(DOF), the Department of Budget and Management (DBM), the National Economic and Development Authority (NEDA) and the Office of the President (OP) as well as the BSP. The adoption of the new framework of monetary policy is being supported by the members of the DBCC.
Since 2000, the BSP has been conducting nationwide public consultations with various groups including the Government, the academe, the banking community, the private sector and the media. These public consultations will continue in 2002.
Inflation targeting is envisioned to strengthen the BSP’s ability to deliver on its mandate of promoting price stability conducive to sustainable and balanced economic growth. This framework commits the BSP to sound fundamentals in the formulation and implementation of monetary policy. The important elements of the new framework are as follows:
Formal announcement of the inflation target. The new framework involves the announcement of a specific quantitative inflation target which the BSP— with the support of the Government—commits to achieve through appropriate adjustments in the various monetary policy instruments.
Greater transparency and accountability. Inflation targeting will also promote greater transparency and accountability—two important features of good governance. The announcement of a specific quantitative target will allow the public to judge the performance of the BSP vis-à-vis its primary mandate by comparing actual inflation against the inflation target. The BSP will also publish a quarterly inflation report in addition to other reports that it has been regularly providing the market. The quarterly inflation report will contain a review of economic and financial developments and their effects on inflation, an assessment of monetary conditions, an analysis of the demand and supply conditions affecting future inflation, an explanation of the motivations for the BSP’s recent monetary policy actions, and a discussion of the inflation outlook over the policy horizon. The intention is to communicate clearly to the public the Government’s inflation target as well as the BSP’s policy intentions and actions and the reasons behind them. In addition, the minutes of the discussion of the Monetary Board on monetary policy issues will also be published with some time lag in order to provide the public with an account of the grounds for monetary policy decisions. In the event that actual inflation deviates from the inflation target, the BSP will issue an open letter to the President explaining the reasons behind such deviation along with the measures to be adopted to bring inflation back to target.
Overall, the new framework is expected to strengthen the BSP’s strategic role in promoting sustainable economic growth by keeping inflation low, stable and predictable and the banking system safe and sound.