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Figure 6 shows the Inflation Targeting: Process Flowchart, starting with the

announcement of the inflation target by the BSP in coordination with the government.

Then the BSP generates inflation forecasts using as wide a set of information as possible.

The forecast is then compared with the inflation target; the BSP will have to adjust its

policy instrument the overnight Reverse Repurchase and Repurchase rates so that the

inflation target would hit the inflation target. On a regular basis, the BSP will provide

reports explaining its policy decisions and the assessments of the inflation environment

and outlook. In case of a breach of the inflation target, the BSP will have to explain to the

public the reason behind such breach. The BSP will also have to formulate policy with

the view to steering inflation toward the target.

Throughout the implementation of the inflation targeting framework, thus it gives

further consistency and transparency of monetary policy and providing a clearer

framework for assessing the impact of domestic and external influences on inflation

outlook.

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2. Decreased GDP and GNP

The growth of the economy is evidently slowing down with the decreased GDP

and GNP on 2008 far from the uptrend in 2005-2008. Thus, the decrease resulted from

increase in inflation by affecting the economic activities.

Relating to the problem, dependence of the economic growth based on the GNP

and GNP as measure of growth from economic activities, inflation targeting set was not

attained as factor in achieving monetary stability in the Philippines. Considering the

decline in both measures the major assumption is that inflation rate accelerates causes

poor contribution to the national output. Hence, actual inflation is higher than the target.

meaning attainment of the target failed.

Figure7. Real GDP and GNP 2002-2008

Source: BSP Annual Report, 2008

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3. Decreasing Real Interest Rate and Increasing Nominal Lending Rate

Real interest rates, interest rates adjusted for the expected erosion of purchasing

power resulting from inflation or nominal interest rates minus the expected rate of

inflation Bank Average Lending Rates and Treasury bill rates have generally been

declining and reached its lowest in 2008 from inch increase in 2007 from negative rates

in 2005 and 2006.

-6

-4

-2

0

2

4

6

8

2000 2001 2002 2003 2004 2005 2006 2007 2008

Real Interest rates (2000-2008)

Manila Ref. Rates (90 days)T-bills 91 daysTime Deposits (all maturities)Bank Ave. Lending Rates (all maturities)

Figure 8. Real Interest Rate (2000-2008)

Source: Figures from Exhibit 1

As shown in figure 8 there is sudden increase of nominal interest rates or bonds

that was not yet adjusted. In 2008 Treasury bill increased meaning that the interest that

will be incurred in a year increases.

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0

2

4

6

8

10

12

14

2000 2001 2002 2003 2004 2005 2006 2007 2008

Nominal Interest Rates (2000-2008)

Manila Ref. Rates (90 days)T-bills 91 daysTime Deposits (all maturities)Bank Ave. Lending Rates (all maturities)

Figure 9.Nominal Interest Rate (2000-2008)

Source: Figures from Exhibit 1

Showing both graph is influenced mainly by increased inflation making it higher

that its target, with the decrease in real interest rate and increase in nominal rate the

economic performance of the Philippines slowdown.

4. Weakening Peso Exchange Rate

A stronger peso connotes better purchasing power, thus keeping it lower value

compare to foreign currency gives more value buying foreign and maintaining inflation

that will impact on contributing higher percent on GNP and GDP and making

international debt payment more ease considering stronger peso.

Exchange rate is a factor in determining the quantity of Exports and Imports of

the country; the higher exchange rate means lower imports and high exports. The exports

and imports are generally a determinant of inflation range. Thus, the exchange rate

affects the inflation targeting of BSP through the exchange rates.

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Figure 10. Peso-dollar exchange rates (2000-2008).Source: BSP 4th Quarter Inflation Report, 2009

Exchange rate and inflation are related through purchasing power parity, inflation

affect the purchasing parity and the results is the changes in exchange rate. In relation to

the problem of not attaining the target inflation rate exchange rate contribute

stabilization of the external sector of the economy leading to sustained economic

activities beneficial in maintaining inflation.

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ALTERNATIVE COURSES OF ACTION

1. Maintain Strong Peso Foreign Exchange Rate

In maintaining strong foreign exchange rate of the peso and its convertibility into

other freely convertible currencies, BSP as a monetary regulator of the Philippines can

engage in foreign exchange transactions with banking institution operating in the

Philippines, the government, its political subdivisions and instrumentalities, foreign or

international financial institution and foreign government and their instrumentalities. This

transaction includes borrowing from foreign banks and other foreign international

entities. The effect of foreign exchange to inflation is that in the government point of

view the lower the equivalent of 1 US Dollar for example means a better performance of

the country in the money supply side. Foreign exchange rates dictate the flow of export

and imports which affects the Gross Domestic Product. The higher rate of foreign

exchange means greater cost to the country in importing and greater profits in exporting.

In times of high foreign exchange rate country tends to increase its exports to earn profits

indicating balanced and sustainable economy triggering down the increase in inflation

toward achieving its desired inflation target.

Advantages:

can maintain international stability

can maintain convertibility of peso

promote the domestic investment of bank resources

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Disadvantages:

Borrowing from international entities pledge any gold or other assets which

serve as the collateral for the loans engage from foreign entities

International transact can cause fall in international reserve due to payments

or remittances abroad

2. Reassess Inflation Targeting Process

The BSP has a number of monetary policy instruments at its disposal to promote

price stability. To increase or reduce liquidity in the financial system, the BSP uses open

market operations, accepts fixed-term deposits, offers standing facilities and requires

banking institutions to hold reserves on deposits and deposit substitutes. Upon using the

inflation targeting framework which is not seems to hit by the actual inflation. Due to this

situation, the trainees suggest to reassess the inflation targeting process on the part used

by the BSP on not attaining the target inflation. Stated on the flowchart upon not

attainment of the target was the usage of Adjust Policy Interest Rate and Government

Rethinks Inflation Target. These two alternatives seem not to solve the problem on not

attaining the target inflation.

The trainees suggest the BSP together with the government to reassess the

solutions on how to attain the target inflation. Starting from the evaluation of the

effectiveness of the monetary instruments used to hinder inflationary pressures.

Additional actions or study upon not meeting the target and how to meet the target is

advised.

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Advantages:

May attain the desired inflation target through reassessment

May stabilize the price through reviewed policy

Provides other solution to the problem by creating a better understanding and

development process of hitting the target inflation.

May attain BSPs goals and objective and economic sustainability

Disadvantages:

May suggest other alternative monetary policy targeting meaning changing

inflation targeting

It is costly to renew the monetary policy it includes additional workforce and

it is time costly

3. Shift to Other Monetary Policy Framework Targeting

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Central Banks are the guardians of macroenomic stability. In most cases, they

have been successful in discharging this responsibility because they have been allowed to

focus primarily on their role of promoting price stability, with their role intentionally

shifting from one development to one of stabilization.

Inflation targeting is monetary framework used by the BSP today. Another

alternative framework that the BSP may exercise is the Nominal GDP Targeting and

Exchange Rate Targeting.

Under a nominal GDP targeting framework, the policy authorities set targets

for nominal GDP adjusts operating targets in order to achieve the nominal GDP targets.

Policy adjustments under this targeting framework incorporate an automatic stabilizing

feature. Exchange rate targeting, the central bank can adjust its policy rates or performs

exchange rate operation in order to maintain an exchange rate target.

Advantages:

May be the solution to satisfactory attain and maintaining price stability

conducive to a balance and sustainable growth of the economy.

Disadvantages:

Lack of reliable advance indicator, which would hamper its success

Public understanding is less

Gamble on the Philippine situation towards development

RECOMMENDATIONS

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The recommendation formulated is based on the facts of the case and the

alternative courses of actions stated on the recent pages of the case study. According to

the scenario that the Bangko Sentral ng Pilipinas did not attain its inflation target range

from the 2003 2008 upon on its implementation on 2002, it is recommended to reassess

its current monetary policy framework in targeting inflation rates.

The trainees choose alternative number two to reassess its monetary policy

process to increase the chance to meet the inflation target set by the Bank and alternative

courses of action three other alternative monetary policy framework considerations. It is

advisable to find alternatives other than adjusting policy rates and governments rethinks

of inflation target, policy because the inflation targeting framework policy which is

exercise by the Bank didnt attain the desired inflation target range set by the BSP.Together with the reassessment of the inflation targeting the trainees also

recommend to consider a new alternative monetary policy because for eight years the

BSP didnt attain or reach its target range by using inflation target framework. Maybe

this time by using other framework it might meet the satisfactory level of measuring the

economic performance.

CONCLUSIONS

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Problems regarding to the failure of the BSP to reach it target range of may cause

a lot of harm not only to the economy itself but also to the areas associated with it the

community, our country, and the people Filipino.

After application of alternative courses of action - Reassess Inflation Targeting

Process the trainees conclude that further understanding of the process of inflation

targeting frameworks makes it more effective on the part of BSP to attain the targeted

inflation as well as making the prices stability as their major objective.

Looking ahead, the implementation of alternative course of action number three

Other Alternative Monetary Policy Framework Consideration the trainees believe that by

these means the Monetary Authority BSP will be more accurate and prudent in

measuring the Philippine economy.

It may also continuously affect the overall performance and operations of the BSP

and government and the economy. Full array of its policy instruments to maintain monetary

and financial stability that will reinforce confidence in the economy. Collaboration with

fiscal authorities and other regulatory agencies, as well as with its foreign/regional

counterparts, will help put the country in a stronger position to weather the ongoing global

financial storm.

POTENTIAL PROBLEM

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Upon choosing the alternative, one of the major issues in reassessing the inflation

target framework as used by the BSP is the additional need for the reliable information to

the study, the same way with the other course of action on considering other monetary

policy framework.

SOLUTIONS TO THE POTENTIAL PROBLEMS

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Seeking knowledge and aid from experts and skilled monetary authority

organizations (e.g. World Bank and International Monetary Fund) is the best potential

solution. In this way, the management can establish pro-active and preventive approaches

the Bangko Sentral ng Pilpinas can use and implement in the long run.

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REFERENCES

Books

BUENAVENTURA, R.C. B., Perspective from the Bangko Sentral ng Pilipinas Moneyand Banking in the Philippines, 2003

FROYEN, R.T. Macroeconomics: Theories and Policies, Prentice- Hall, Inc. 6th edition,

1999

LAMAN, R.M. et. al, Financial System, Market and management The Basics, 2008edition

MEDINA , R.G. Principles of Economics, 1st edition, 2003

RECTO, M.M. & CORAZON TOLENTINO. Practicum Guide Book. College of

Business Administration and Accountancy, CLSU. 2008

TETANGCO Jr., A.M., Central Banking: In Challenging Times, The Philippine

Experience, 2009

Documents

BANGKO SENTRAL NG PILIPINAS, 2008 BSP Annual Report

BANGKO SENTRAL NG PILIPINAS, 2009 4th

Quarter Inflation Report

BANGKO SENTRAL NG PILIPINAS, 2008 Open Letter on Inflation

Internet

. http://www.bsp.gov.ph/about/overview.asp

7:30 pm. February 12, 2010.

GOOGLEMAPS. http://www.googlemaps.com. 5:24 pm. March 19, 2010

BANGKO SENTRAL NG PILIPINAS. www.bsp.gov.ph/monetary/inflation.asp

3:12 pm. February 12, 2010

WIKIPEDIA. http://en.wikipedia.org/wiki/Inflation 2:20 pm. March 27, 2010

46

http://www.bsp.gov.ph/about/overview.asphttp://www.googlemaps.com/http://www.bsp.gov.ph/monetary/inflation.asphttp://www.bsp.gov.ph/about/overview.asphttp://www.googlemaps.com/http://www.bsp.gov.ph/monetary/inflation.asp

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EXHIBITS

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Exhibit 1. Philippine Selected Economic and Financial Indicator

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Exhibit 2. Monetary Policy of the Bansgko Sentral ng Pilipinas

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A confluence of global and supply-side factors resulted in these unanticipated

movements in commodity prices. First, the inherent volatility in commodity prices was

magnified by adverse weather conditions and speculative activities in global commoditymarkets as the US dollar weakened. Second, world oil prices became highly volatile due

to low global production capacity, tight refining capacity and increasing demand from

emerging market economies, while food prices soared because of the strong demand forcommodities used in bio-fuel production as well as rising fuel and fertilizer costs. All

these translated to unprecedented increases in domestic rice prices as well as the pump

prices of

The role of food and fuel prices should be stressed at this point. Food accounts for

almost half of the Philippine CPI basket, while fuel accounts for almost another 10

percent. Therefore volatilities in international food and oil prices pose huge risks to ourinflation path. In addition, tests of persistence have shown that commodity inflation in the

country tends to be protracted, with food more so than fuel. Thus, increases in rice and

fuel prices are particularly virulent as this figure prominently in Filipino consumers

expectations and could lead to clamors for upward adjustments in wage and transportfares.

How did the monetary authorities respond to emerging challenges to the inflation

outlook over the policy horizon?

The BSP calibrates monetary policy prudently, mindful of the inflation dynamicsin the Philippines.

In this situation, the BSP was aware that the initial rise in prices was primarily

supply in origin and that commodity shocks are transitory in nature. Therefore, followingan approach consistent with the widely accepted principle that supply side developments

are best addressed by non-monetary measures, the BSP kept its policy rates steady. TheBSP considered the rise in prices during the first half of the year as a shift in relativeprices and accommodated such first-round effects, allowing them to pass through in the

form of higher prices.

However, as supply shocks from rising food and energy prices continued over a

longer period, these contributed to second-round effects, affecting the wage and price-setting behavior of businesses and households by the end of the second quarter. A rise in

inflation expectations was also evident from surveys and financial market data, while the

BSPs forecasts showed the risk of inflation exceeding targets for 2008 and 2009. TheBSP responded to these second-round effects with decisive action and strong anti-

inflation pronouncements. It raised key policy rates by a total of 100 basis points from

June to August while strengthening its anti-inflation commentary.The inflation outlook started to improve in September, with the decline in

international commodity prices. Monetary authorities, however, took the view that with

the domestic elevated core inflation readings still rising, there were still price pressures in

the pipeline. The weaker peso also posed an upside inflation risk. Hence, the MonetaryBoard, during its October and November policy meetings opted to keep policy rates

steady to ensure that inflation and inflation expectations were kept at bay.

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Meanwhile, to address any possible tightness in financial markets as a result of

the global financial turmoil, monetary authorities implemented preemptive measures

aimed at providing adequate market liquidity and ensuring the orderly functioning of thefinancial system.

In December, the inflation outlook further improved, showing a decelerating path

over the policy horizon with average inflation falling within the target range in 2010.This outlook reflected the significant fall in the November inflation and the sharper-than-

expected slowdown in global economic growth. Given the downside risks associated with

the declines in commodity prices, the fall in inflation expectations, and the slowdown in

economic activity, the Monetary Board decided to reduce key policy rates by 50 basispoints during its 18 December policy meeting.

What is the outlook for inflation and monetary policy?

Latest baseline forecasts of the BSP show a deceleration in the inflation path; the

annual average inflation may settle within the target range of 2.5-4.5 percent in 2009 and

3.5-5.5 percent in 2010. The positive developments in the prices of commodities and the

recent string of low inflation numbers should significantly relieve inflationary pressuresand keep the publics inflation expectations well anchored. Moreover, prospects of

weaker world economic activity are expected to dampen demand, reducing price

pressures. Under this scenario, the BSP will continue to carefully consider opportunitiesto ease monetary policy, mindful of any potential tightening credit conditions.

We assure the President that the BSP will remain focused on achieving the

countrys price stability objective while providing an environment that ensures sufficientliquidity to support the economys growth requirements.

For the consideration of Her Excellency.

Very respectfully,AMANDO M. TETANGCO, JR.

Governor

26 January 2009

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