How do central banks like the Bangko Sentral ng Pilipinas control inflation?
Answer (2)
Central banks play a major role in controlling inflation through what we call monetary policy. In the Philippines, the Bangko Sentral ng Pilipinas (BSP) uses tools such as interest rates and money supply regulation to maintain price stability. The goal is to keep inflation within a target range (usually 2–4%) to ensure that prices are stable and predictable.The most common tool the BSP uses is the policy interest rate. When inflation rises too fast, the BSP can raise interest rates. This makes borrowing more expensive for consumers and businesses. For example, if interest on housing loans goes up, fewer people will buy houses. If companies have to pay more to borrow money, they may delay expansion. This cools down spending and reduces pressure on prices.Another way the BSP controls inflation is by reducing the money supply. If too much money is circulating in the economy, people spend more, and demand can exceed supply—causing prices to rise. By tightening the supply of money, the BSP can reduce demand and slow down inflation.For example, in 2022, when inflation in the Philippines went above 6% due to global oil prices and supply chain problems, the BSP raised its policy rate several times—from 2% to over 6%. This helped signal to markets and consumers that they were serious about controlling inflation.However, raising interest rates can also slow down economic growth. That’s why central banks must balance the need to control inflation with the goal of supporting jobs and investments. If inflation is caused by external factors (like war or typhoons), monetary policy alone may not be enough, and other measures like subsidies or import policies may be needed.The BSP uses interest rate adjustments and money supply management to stabilize prices. While these tools can affect consumer behavior and business investment, their goal is to protect the economy from runaway inflation and preserve the purchasing power of Filipinos.
Central banks like the Bangko Sentral ng Pilipinas (BSP) control inflation mainly by managing interest rates and money supply. When inflation rises, the BSP can increase interest rates, making borrowing more expensive, which slows down spending and investment. They can also reduce the money supply by selling government securities or increasing reserve requirements for banks. These actions help lower demand in the economy, easing inflation pressure.
