How does the Central Bank control inflation, and why is its role important in a country like the Philippines?
Answer (1)
The Bangko Sentral ng Pilipinas (BSP), plays a very important role in controlling inflation to keep the economy stable. Its main job is to make sure that prices do not rise too fast (inflation) or fall too low (deflation), both of which can hurt people and businesses.The BSP controls inflation mainly by using monetary policy tools, especially through interest rates. One key tool is the policy interest rate, which influences the interest rates charged by banks to borrowers. If inflation is too high, the BSP will raise interest rates to discourage people from borrowing and spending too much. When people borrow and spend less, demand goes down, and prices tend to stop rising. On the other hand, when inflation is too low or the economy is weak, the BSP may lower interest rates to encourage borrowing and spending, which helps the economy grow.For example, during the COVID-19 pandemic, the BSP lowered interest rates to support businesses and workers who were struggling. But when inflation spiked in 2022 due to rising oil and food prices, the BSP began raising interest rates again to bring inflation under control.The BSP also uses other tools such as:Open Market Operations, where it buys or sells government securities to control the money supply.Reserve Requirements, which refer to how much money banks must keep and not lend out.Communications and Expectations Management, where it sends strong messages to the public and markets about inflation targets to guide behavior.In a developing country like the Philippines, where many families have limited income and live paycheck to paycheck, controlling inflation is essential. Rising prices of rice, oil, or school supplies can immediately affect poor households. If the Central Bank fails in this job, it can lead to social unrest, poverty, and economic slowdown. That’s why BSP’s role is critical—not just for the economy, but also for the everyday lives of ordinary Filipinos.
