A statement released by the Bangko Sentral ng Pilipinas (BSP) about its performance in 2014 supports our contention that the BSP may be the most important government agency in regards to the economy and may be the best at doing its job.
The Philippines has managed to contain inflation within the government’s target for six consecutive years, after inflation rate in the fourth quarter of 2014 settled at 3.6 percent.
While the inflation target is wide with a range of 3 percent to 5 percent for the period, in the economic climate of the last six years, meeting any objective has been a challenge.
There are many factors that determine and influence how a nation’s inflation rate is going to move most beyond the control of any government. We have seen that with the recent and ongoing fall in crude oil prices. Natural disasters have always had a major impact on prices in the Philippines.
Economic policy moves by other nations near and far away are beyond the control of the BSP. But it is the reaction and monetary moves of the BSP that create success or failure and we have been fortunate to experience their successes.
However, the BSP is also fortunate to have been created for a single simple purpose.
From the BSP website: “The BSP’s primary objective is to maintain price stability conducive to a balanced and sustainable economic growth. The BSP also aims to promote and preserve monetary stability and the convertibility of the national currency.” In other words, keep prices and the exchange rate of the peso stable.
In contrast the US Federal Reserve must conduct monetary policy credit conditions in the economy “in pursuit of maximum employment, stable prices, and moderate long-term interest rates.” The problem is that those may be conflicting goals that actually may fight against each other.
The European Central Bank also has problems with its mandate: “The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro”. “Safeguarding” the value of the currency is a dangerous economic game as the Swiss National Bank sadly discovered.
The BSP must take a hilltop view of the economy and watch for signs that price increases are caused by an economy being over-heated by too much money supply and adjust their policy accordingly. Likewise, the BSP must insure that there is enough money in the system to allow for enough economic activity without inflation.
Of course BSP policies indirectly influence employment, the exchange rate of the peso, and all the other aspects to the economy. But effectively focusing on a single task of peso stability and controlled inflation creates the best foundation for overall economic growth and the BSP has done its job well.