BANGKO SENTRAL NG PILIPINAS, MALATE,MAYNILA,PILIPINAS:
A CASE STUDY
INTRODUCTION
“The Congress shall establish an independent central monetary
authority… (which) shall provide policy direction in the areas of
money, banking and credit. It shall have supervision over the
operations of banks and exercise such regulatory powers as may be
provided by law over the operations of finance companies and other
institutions performing similar functions.”
Section 20, Article XII, 1987 Philippine Constitution
“The State shall maintain a central monetary authority that shall
function and operate as an independent and accountable body
corporate in the discharge of its mandated responsibilities concerning
money, banking and credit. In line with this policy, and considering its
unique functions and responsibilities, the central monetary authority
established under this Act, while being a government-owned
corporation, shall enjoy fiscal and administrative autonomy.
Section 1, Article 1, Chapter 1
Republic Act No. 7653 (The New Central Bank Act)
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An example of how the legal framework evolves according to pressing need in the
enactment of the present New Central Bank Act – Republic Act No. 7653. Its
promulgation in 1993 may be said to be greatly influenced by the trend among central
banks around the world to singularly focus on maintaining price stability in their
respective economies.
Prior to the promulgation of the Republic Act 7653, the Philippine central bank’s
goal were multifarious. These goals, among other objectives, involved the attainment of
full employment and upholding the competitiveness of the exchange rate. However with
Republic ct 7653, central banking efforts are now driven towards attaining price stability
through the current framework of inflation targeting. The change in its avowed purpose
required stronger central bank independence.
Inflation is a rise in the general level of prices of goods and services in an
economy over a period of time. When the price level rises, each unit of currency buys
fewer goods and services; consequently, inflation is also erosion in the purchasing
power of money – a loss of real value in the internal medium of exchange and unit of
account in the economy. A chief measure of price inflation is the inflation rate, the
annualized percentage change in a general price index (normally the Consumer Price
Index) over time. Inflation can have many effects that can simultaneously
have positive and negative effects on an economy. Negative effects of inflation include a
decrease in the real value of money and other monetary items over time; uncertainty
about future inflation may discourage investment and saving, or may lead to reductions in
investment of productive capital and increase savings in non-producing assets. e.g. selling
stocks and buying gold. This can reduce overall economic productivity rates, as the
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capital required to retool companies becomes more elusive or expensive. High inflation
may lead to shortages of goods if consumers begin hoarding out of concern that prices
will increase in the future. Positive effects include a mitigation of economic recessions,
and debt relief by reducing the real level of debt.
Economists generally agree that high rates of inflation and hyperinflation are
caused by an excessive growth of the money supply. Views on which factors determine
low to moderate rates of inflation are more varied. Low or moderate inflation may be
attributed to fluctuations in real demand for goods and services, or changes in available
supplies such as during scarcities, as well as to growth in the money supply. However,
the consensus view is that a long sustained period of inflation is caused by money supply
growing faster than the rate of economic growth.
Today, most mainstream economists favor a low steady rate of inflation. Low (as
opposed to zero or negative) inflation may reduce the severity of economic recessions by
enabling the labor market to adjust more quickly in a downturn, and reduce the risk that
a liquidity trap prevents monetary policy from stabilizing the economy. The task of
keeping the rate of inflation low and stable is usually given to monetary authorities.
Generally, these monetary authorities are the central banks that control the size of the
money supply through the setting of interest rates, through open market operations, and
through the setting of banking reserve requirements.
The important role of monetary authorities is to maintain the confidence of the
consumer and their ability to control inflation. It will be more likely that the monetary
authorities would increase interest rates if they suspect inflation even if the increase will
risk recession.
