benjamin e diokno : monetary policy and central banking toward a new economy speech by mr benjamin e diokno, governor of bangko sentral ng pilipinas ( bsp, the central bank of the philippines ), at the philippine economic briefing for the joint foreign chambers, 25 november 2021. * * * to our colleagues in the philippine government, members of foreign chambers, ladies and gentlemen, good afternoon. i recall i last spoke before the joint foreign chambers in july this year. i am pleased to speak before you again, this time, amidst better circumstances, as recent macroeconomic developments point to a strong and sustainable recovery for the philippine economy. i always say that while monetary policy only plays a complementary role in addressing the impact of this health crisis, it is a critical one. as such, the bsp has done quite a lot to support economic recovery. we are among the first central banks to respond to the pandemic. we cut policy rates to record lows and reduced the reserve requirement. as of october 14, 2021, bsp has injected ₱2. 3 trillion – approximately usd46 billion – into the philippine financial system. this is equivalent to 12. 8 percent of gdp. we also implemented extraordinary measures, including provisional advances to the national government and purchase of government securities in the secondary market. the bsp also implemented time - specific and well - targeted regulatory relief measures to enable our supervised financial institutions to continue supporting the domestic economy. once full recovery of the economy is underway, the bsp will implement a pre - planned exit strategy which shall safeguard the sustainability of the economic recovery while guarding against any emerging threats to the bsp ’ s price and financial stability objectives. as bsp keeps policy rates low and maintains accommodative policy stance, it has been observed that banks pass on lower and declining interest rates to their clients. our efforts to help safeguard livelihood, maintain order in the financial markets, and fuel growth are yielding positive results. following the 12. 0 - percent rebound in the second quarter, our third - quarter growth rate of 7. 1 percent was among the highest in the asean. the nascent economic recovery is being supported by positive developments on the monetary, external and banking fronts. inflation is decelerating as food prices decline. looking ahead, inflation could settle above the 2 to 4 percent target range this year but is expected to revert to our target range in 2022 and 2023. the bsp will continue to closely monitor

the instruments used today for the fine - tuning of the liquidity and interest rates in the south african market. there is, however, one possible consequence which we should be aware of and prepared for. in the economic literature on inflation targeting, a concern has been expressed that direct inflation targeting could easily lead to excessive short - term - and even medium - term - fluctuation in the nominal ( and real ) exchange rate. this has been a common experience in inflation targeting countries. there are many causes for the observed fluctuations in the exchange rates. in some countries strong fiscal and structural policy adjustments have given a support to such changes, as well as portfolio shifts. in the case of south africa, the exchange rate is included as an important element in the macroeconomic monetary policy model used by the reserve bank. exchange rate changes come out as a result of the policy process and not as an independent objective. greater nominal exchange rate changes, if these should materialize, is a concern for namibia for reasons i already have touched upon. however, these consequences are not likely to be severe. exchange rate fluctuations are nothing new to the financial and commercial community in namibia. it should also be emphasized that an inflation target could in itself promote considerable stabilization of the nominal exchange rate. so far, experiences with inflation targeting regimes indicate that the largest fluctuations are prompted by a lack of credibility of the regime. as credibility improves, the exchange rate variability should generally be limited to normal fluctuations in the real exchange rate. international trends in exchange rate arrangements as we are entering a new decade, fixed exchange rate systems seem generally to be replaced with floating exchange rates. the international foreign exchange market is now dominated by three major currencies - the us dollar, the yen and the euro - which are floating against each other. none of these three will have explicit inflation targets as the objective for monetary policy, but in practice their orientation of monetary policy is one of implicit inflation targeting. in the us, for example, the federal reserve has made it very clear that it is its assessment of inflationary pressures and the outlook for inflation that is the major determinant of any monetary policy adjustments. although the european central bank has adopted a system of monetary targeting, in practice the monetary policy regime resembles inflation targeting quite closely. it is more difficult to classify monetary policy in japan, but the fact is that inflation has been brought down to very low levels. the trend among industrial countries and emerging economies appears to be the adoption of formal inflation targeting. although