Monetary Board’s good, expected move


THE Bangko Sentral Monetary Board is living up to its pledge to keep financial stability in our country. It did the perfectly correct move of raising—by one percentage point– the amount of money banks must have in reserve. That act alone sucks out about P60 billion from the total amount in circulation to keep it out of the public’s hands and in the banks’ vaults.

That serves to make it a bit more difficult for well-to-do people and families to splurge. Spending sprees cause the price of products to go up. That’s because demand for products exceeds the supply and when this happens product sellers raise their prices.

That, in the simplest description, is inflation.

Inflation has been getting scarier these past years. The government’s National Statistics Office tells us that–with the 2006 figures as the basis (or 100 %) in comparing inflation rates (or how high the prices of key commodities have risen or fallen through the years)–inflation in February 2014, was 4.1%. That is within the government’s target.

But 4.1% is higher than the 3.4 rate in February 2013 and much higher than the 2.6 rate in February 2012, lower than the 4.7 rate in February 2011, but higher than the 3.9 % rate in February 2010 (before Benigno S. Cojuangco Aquino became president on July 1, 2010).

In addition to this new move the other day of slightly increasing the banks’ reserve requirement, the central bank’s Monetary Board could also change the key policy rates for loans to help curb inflation. Making interest rates higher would also slow the rise of prices because higher interest rates would make people think twice about borrowing money for the new dream car or to splurge on a trip to Boracay or on a lavish birthday party.

The trouble with making the cost of money higher to arrest inflation is it would make the poor—who borrow every week as a matter of course to make ends meet– suffer more.

The Bangko Sentral Monetary Board’s policy rates have been at record low levels since October 2012. But since last year, the BSP has been worried enough by inflation to mention every now and then the possibility of “changing” the rates.

Our Business Times banner story today is the forecast made by the Standard Chartered Bank that it expects the BSP to take more steps to tighten monetary policy by the second quarter until the end of 2014.

Inflation targetting
In the Bangko Sentral’s own words—found as the first article in its website – “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.”

“The Inflation Target. The government’s inflation target is defined in terms of the average year-on-year change in the consumer price index (CPI) over the calendar year. The inflation targets have been set at 4 ± 1 Percentage Point for 2013-2014 and at 3 ± 1 Percentage Point for 2015-2016.”

The target is being met–so far. Thank God.


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