How does the government use monetary policy to fight inflation? Give an example from the Philippines.
Answer (1)
Monetary policy is the way a country's central bank, like the Bangko Sentral ng Pilipinas (BSP), controls the money supply and interest rates to keep inflation under control. When inflation is too high, the BSP uses contractionary monetary policy to slow down the economy and reduce price increases.One of the main tools used by the BSP is raising interest rates. Higher interest rates make borrowing more expensive for businesses and consumers. For example, if interest rates increase, it becomes more costly to get car loans, housing loans, or business loans. People borrow and spend less, which reduces demand in the economy. When demand decreases, prices are more likely to stabilize or even fall.Another effect is on savings. If banks raise deposit interest rates, people are more likely to save money instead of spend it. This also reduces consumer demand, helping to slow down inflation.A real example happened in 2022–2023, when inflation in the Philippines rose to more than 8% due to high food prices, global fuel increases, and supply chain issues. In response, the BSP raised interest rates several times, going from 2% to over 6%. This helped reduce demand and showed investors and businesses that the central bank was serious about controlling inflation.These changes had real effects. People became more cautious about spending. Some delayed buying homes or cars. Businesses also slowed expansion plans due to more expensive loans. Over time, inflation rates began to decline.
