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Introduction
Contractionary monetary policy slows the rate of growth in the money supply or outright
decreases the money supply in order to control inflation; while sometimes necessary,
contractionary monetary policy can slow economic growth, increase unemployment and
depress borrowing and spending by consumers and businesses.
Money is fundamental in the functioning of the economy. It facilitates the exchange goods and
service and reduces the amount of time and effort to carry out a trade transaction.
Functions of money
Medium of exchange
Unit of account
Store of value
Standard for deferred payments.
Monetary policy - is the macroeconomic policy laid down by the central bank. It involves
management of money supply and interest rate and is the demand side economic policy used by
the government of a country to achieve macroeconomic objectives like inflation, consumption,
growth and liquidity. Monetary policy is the macroeconomic policy laid down by the central
bank. It involves management of money supply and interest rate and is the demand side
economic policy used by the government of a country to achieve macroeconomic objectives like
inflation, consumption, growth and liquidity.
The primary objective of BSP's monetary policy is to promote a low and stable inflation
conducive to a balanced and sustainable economic growth. The adoption of inflation targeting
framework for monetary policy in January 2002 is aimed at achieving this objective.
Open-market operations,
Discount rate, and
Reserve requirements.
Open Market Operations (OMO)
In a repurchase transaction, the BSP buys government securities (GS) from a bank with a
commitment to sell them back at a specified future date at a predetermined rate, resulting in an
expansionary effect on liquidity. Conversely, in a reverse repurchase (RRP) operation, the BSP
also acts as the seller of GS and the banks payment to the BSP has a contractionary effect on
liquidity.The interest rate for the overnight RRP facility signals the monetary policy stance and
serves as the BSP s primary monetary policy instrument. The RRP facility is offered to qualified
counterparties daily using a fixed-rate and full-allotment method, where individual bidders are
awarded a portion of the total offered amount depending on their bid size.
An outright contract involves direct purchase/sale of government securities by the BSP from/to
the market for the purpose of increasing/decreasing money supply on a more permanent basis. In
such a transaction, the parties do not commit to reverse the transaction in the future, creating a
more permanent effect on the banking systems level of money supply.
Foreign exchange swaps refer to transactions involving the actual exchange of two currencies
(principal amount only) on a specific date at a rate agreed on the deal date (the first leg), and a
reverse exchange of the same two currencies at a date further in the future (the second leg) at a
rate (different from the rate applied to the first leg) agreed on deal date.
Discount Rate -The Monetary Board decided to maintain the interest rate on the BSPs
overnight reverse repurchase (RRP) facility at 3.0 percent. The corresponding interest rates on
the overnight lending and deposit facilities were also kept steady. The reserve requirement ratios
were likewise left unchanged.
SECTION 94. Reserve Requirements. In order to control the volume of money created by
the credit operations of the banking system, all banks operating in the Philippines shall be
required to maintain reserves against their deposit liabilities: Provided, That the Monetary Board
may, at its discretion, also require all banks and/or quasi-banks to maintain reserves against funds
held in trust and liabilities for deposit substitutes as defined in this Act. The required reserves of
each bank shall be proportional to the volume of its deposit liabilities and shall ordinarily take
the form of a deposit in the Bangko Sentral. Reserve requirements shall be applied to all banks of
the same category uniformly and without discrimination.
Reserves against deposit substitutes, if imposed, shall be determined in the same manner as
provided for reserve requirements against regular bank deposits, with respect to the imposition,
increase, and computation of reserves.
The Monetary Board may exempt from reserve requirements deposits and deposit substitutes
with remaining maturities of two (2) years or more, as well as interbank borrowings.
Since the requirement to maintain bank reserves is imposed primarily to control the volume of
money, the Bangko Sentral shall not pay interest on the reserves maintained with it unless the
Monetary Board decides otherwise as warranted by circumstances.
Economics 2 -Microeconomics
Submitted by
Michelle A. Bulatao
Maridane Moya
Abigail Cortias
BSBA III
Submitted to