Price Stability - Inflation Targeting: The BSP's Approach to Monetary Policy

​​​​​​​​​​Download Primer on Inflation Targeting

The primary objective of the BSP's monetary policy is “to promote price stability conducive to a balanced and sustainable growth of the economy” (Republic Act 7653). The adoption of inflation targeting framework of monetary policy in January 2002 is aimed at achieving this objective.

Inflation targeting is focused mainly on achieving a low and stable inflation, supportive of the economy’s growth objective. This approach entails the announcement of an explicit inflation target that the BSP promises to achieve over a given time period.

To achieve the inflation target, the BSP uses a suite of monetary policy instruments in implementing the desired monetary policy stance, depending on its assessment of the outlook for inflation. If the BSP perceives the inflation forecast to exceed the target, then it implements contractionary monetary policy to bring down inflation to its target path. 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. The reverse repurchase (RRP) or borrowing rate is the primary monetary policy instrument of the BSP.


Open Market Operations

  • Raising or lowering the overnight RRP rate (policy rate) or rate at which BSP borrows from banks and eligible financial institutions using its holdings of government securities as collateral
  • Issuance of BSP securities to absorb excess liquidity from the financial system by locking funds in longer-term monetary instruments
  • Outright sale or purchase of government securities

Acceptance of Term Deposits

 

Standing Liquidity Facilities

 

  • Offering standing liquidity (deposit and lending) windows to absorb or provide liquidity at the initiative of the counterparty

Other Liquidity Management Facilities

 

  • Increasing/decreasing the reserve requirement or the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP which they cannot lend out, or where available through reserve-eligible government securities
  • Adjusting the rediscount rate on loans extended to financial institutions on a short-term basis against eligible collateral of banks' borrowers
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Created:6/17/2020 3:21 PM   by:  Pambid Frederick D.
Modified:4/20/2021 9:35 AM   by:  Pambid Frederick D.