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Wednesday, September 27, 2023

About time the BSP charter is amended Part 2

In my article last week, I welcomed the separate initiatives of  House Speaker Feliciano Belmonte and Senate President Franklin Drilon who have filed proposed amendments to the 21 year old Bangko Sentral charter or Republic Act  7653.


To emphasize the urgency of the amendments, President Aquino has included the proposals among the priorities of the second session of the 16th Congress.


This is as it should be considering  the changes in the economic milieu, the integration of financial markets due to globalization and the speed with which the scope of operations of financial institutions has evolved.


The proposed amendments to the BSP Charter  fall under three important categories. They seek  to:


1. Strengthen BSP’s monetary stability function

2. Strengthen BSP’s monetary financial stability function and

3; Strengthen BSP’s corporate and financial viability.


In last’s week’s article, I zeroed in on the proposed measures to strengthen BSP’s corporate and financial viability.  In this article, allow me to focus on the importance of   measures which will further enhance the ability of BSP to maintain/promote price and monetary stability.


Simply put, this function covers BSP’s objective of keeping inflation low and stable. This task requires a continuous delicate, calibrated and pro-active balancing act on the part of BSP.


To paraphrase a fencing instructor in a movie which I saw years ago:  Like a foil, inflation is like a bird. If you hold it too tight, it will die. If you hold it too loose, it will fly.


To use a medical analogy on blood sugar levels. Either too low or too high inflation rate will be hazardous.


To stabilize inflation, the BSP uses measures and actions (collectively termed as “monetary policy”) to influence not only the level of money supply  but also the timing, the cost and availability  of money and credit.


Among the tools or “monetary policy instruments” to achieve the desired level of liquidity are the following:


1.     Raising or reducing the BSP’s policy interest rate (or the rate at which  the BSP borrows or lends)

2.     Increasing or decreasing reserve requirements

3.     Accepting or discouraging deposits in the so-called Special Deposit Account or SDA

4.     Increasing or decreasing the rediscount rate

5.     Outright sales /purchase of BSP’s holdings of government securities. This is known as Open Market Operation or OMO.

6.     Of course, the BSP can also exercise its influence on banks and supervised institutions to conduct their operations in a manner that would contribute towards the attainment of monetary goals. (Moral Suasion)


Any of these tools, used either singly or collectively, can either withdraw or inject liquidity into the system thus influencing the inflation rate.


One of the key  proposals (in both the Belmonte and Drilon amendments)  focuses on Open Market Operations or OMO.


The proposed amendment seeks to give the BSP more elbow room in OMO by removing the restriction on  the BSP’s capability   to henceforth issue its own certificates of indebtedness.


When the BSP Charter was approved 21 years ago,  the legislature limited the issuance of these certificates of indebtedness  to only “cases  of extraordinary movement in price levels”. Because of this restrictive condition, the BSP has not issued its own certificate of indebtedness since 1993, thus depriving the BSP of more flexibility in exercising effective monetary control.


Another important proposed amendment  takes into consideration the shift of the  Bangko Sentral to inflation targeting. The adoption of inflation targeting has rendered unnecessary the continued  limitations on monetary aggregates, credit and prices as guiding principles in monetary administration. Thus the amendment seeks to do away with these restrictions.


After 21 years, the approval of these amendments to the BSP charter is long past due.

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