Monetary policy will remain committed to the achievement of low and stable inflation that is conducive to a balanced and sustainable growth of output and employment. Monetary authorities will be alert to signs of emerging inflation pressures to consolidate the hard-won price stability that has contributed to policy predictability and enabled households and businesses to make better informed decisions. This stance entails continuous macroeconomic surveillance efforts for a more effective management of risks. At the same time, monetary authorities will continue to improve their communication of policy intentions and actions.
In recent years, monetary authorities have implemented a number of reforms to enhance the effectiveness of the monetary policy framework. In 2006, the way the inflation target was arrived at was changed from specifying a range to specifying a point with a tolerance interval which effectively widened the BSP's target band. A broader target band provides added flexibility to monetary authorities in steering inflation, particularly in the domestic setting where consumer prices are subject to large supply shocks because of the sizeable share of food items in the consumer basket. The economic policymakers also announced in 2010 the shift to a fixed medium term inflation target from a variable annual inflation target. The adoption of a fixed medium term inflation target aims to promote a long-term view of inflation, help better anchor inflation expectations, and support consumption and investment by fostering greater predictability in economic decisions (Table 2.5).
The monetary authority's reform agenda will focus on improving the institutional set-up and fine-tuning the procedures of inflation targeting. Key measures to be pursued for more effective inflation management include the following:
a. Given the interdependent real and financial markets across the globe and the risks involved, the BSP shall pursue the expansion of its monetary policy toolkit to enhance the flexibility and efficiency of its monetary operations with a view to safeguarding both price and financial stability.
b. Pursuant to the provisions of RA 7653, the monetary authorities will request the full capitalization of the BSP to ensure that financial losses from time to time do not deter the BSP from fulfilling its mandate of maintaining price stability. A bigger capital base will enhance the BSP's financial autonomy and credibility, giving more confidence to the market.