Exchange Rate O It example essay topic

HOW THE CENTRAL BANK USES DIFFERENT TOOLS TO COMBAT INFLATION The Central Bank contributes to economic stability when it uses monetary policy and banking reforms against storms such as inflation. Stability is both political and economic: it ranges from peace and order, internal and external security, and a functioning justice system to minimal movements in prices, interest rates, and exchange rates. Growth is the continuing and sustainable rise in output, income and employment. And equity is the widening of the sharing of the fruits of growth, with preferential attention to the poor. Growth is the business of the private sector working in a free market, with the government supporting it with basic services, infrastructure, and a sound policy and regulatory environment. Equity results from a whole host of factors, including the efficiency of the investment and labor markets, the profile of investments made, the structure of investment incentives, the pattern of government expenditures, tax laws, labor laws, and the like.

The BSP strives to maintain domestic price stability. If liquidity from other sources threatens to heat up domestic price levels, in other words, inflation, the BSP will counteract it. The BSP does this by doing the following: o It sees to it that enough liquidity is provided to satisfy the operations and growth requirements of business, but with a wary eye on the inflation rate and on the exchange rate. o It works towards the lowest interest rates possible, consistent with keeping the real interest rate positive and without jeopardizing the stability of domestic price levels and of the peso's exchange rate. o It fines-tune and balance the movements of domestic interest rates and the exchange rate and keep them within a general band, to maintain a stable environment. o It keeps the balance between the levels of domestic with foreign interest rates, to prevent speculative capital movements whether inward or outward. o It maintains the present free market in foreign exchange. The foreign exchange rate will be essentially market-determined, under a floating rate system. Any intervention by the BSP in the FOREX market will be temporary and will be aimed at minimizing the volatility of the exchange rate, not at setting its level or its trend. o It strives to build up further our international reserves, beyond the present record levels. The higher our reserves, the greater our ability to withstand shocks, and the stronger the confidence of the public in the health of the economy.

In addition to adopting these monetary guidelines, the BSP continues to pursue its program of institutional and structural reform in the banking system. This is to enhance the strength of the banking system and its capability to serve the financial requirements of our development, and to withstand the kind of shocks that we experienced with the Asian crisis and in the facing of changing global economic trends affecting us. The BSP continues to upgrade its monitoring and supervision systems, tightening prudential practices, building strong risk management mechanisms, improving problem recognition processes and capabilities of banks, and providing training to bank examiners and reviewers of the Bangko Sentral. It supports certain bills in the legislative pipeline. These include bills to amend the General Banking Act and the New Central Bank act. These amendments aim at strengthening further our regulatory oversight, raise prudential standards to international norms, foster greater competition, and enhance the supervisory capability and independence of the Bangko Sentral.

The BSP fosters a more efficient, strong, and stable financial system in a deregulated environment. These efforts include: initiatives to further increase the minimum capitalization of banks; to provide incentives for mergers; and to liberalize the equity and citizenship structure of banks.