The New Central Bank Act of 1993 created the Bangko Sentral ng Pilipinas and entrusted it with a pivotal task: maintaining price stability in the country.
From 1993 to 2023, the BSP’s strategy for maintaining price stability has evolved in line with the changing economic landscape, domestically and globally. In its early years, the BSP adopted a monetary targeting framework, under which it would target a certain level of money supply in the economy to manage inflation.
In 2009, the BSP began incorporating banking regulations meant to help manage liquidity in the economy into its policy toolkit. Indeed, financial stability and price stability are intertwined. As part of its oversight function, the BSP sets the thresholds for key metrics, such as loan-to-value ratio and capitalization. Stress testing exercises are also conducted. The objective is to protect the financial system from potential shocks and to prevent unsustainable credit growth.
Under the Tinbergen Rule, policymakers need multiple tools to address several objectives. The BSP avoids overreliance on any single tool and, aside from the policy rate, has several weapons in its arsenal to bring inflation to a target-consistent path.
Source: Financial Digest (financialdigest.net)
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