Three pillars of central banking through the years

First pillar: Price stabilityTHE approach to price stability in the Philippines has evolved, reflecting shifts in economic theories, policy approaches and global best practices. The central bank's role in maintaining price stability has become more sophisticated, emphasizing inflation targeting, data-driven analysis and proactive policy adjustments to manage inflation while supporting overall economic growth.Upon its establishment, the primary mandate of the Central Bank of the Philippines (CBP) is to promote economic stability, focusing on maintaining external and internal monetary stability. The central bank has utilized traditional tools such as reserve requirements, discount rates and selective credit controls to manage liquidity and influence prices. Like many other countries, the Philippines has faced inflationary pressures in the 1970s, partly due to the oil crisis and increased global commodity prices. The CBP has responded with tighter monetary policies, including higher reserve requirements and interest rate adjustments. However, these measures are often constrained by broader economic and political factors. The 1980s have marked a severe debt crisis and economic instability, leading to high inflation rates. In response, the government and international financial institutions have implemented structural adjustment programs, including monetary tightening measures to control inflation. The 1990s have witnessed significant economic reforms, including liberalization and deregulation. Toward the end of the 1990s, there had been a global shift toward inflation targeting as a framework for monetary policy. The Philippines has moved in the same direction although full adoption has come later. In 2002, the Philippines has formally adopted an inflation-targeting approach. This marks a significant shift in the Bangko Sentral ng Pilipinas (BSP)'s policy framework, which focuses on achieving and maintaining price stability as its primary objective. The new framework is more transparent and forward-looking, using a range of indicators, including inflation forecasts, to guide monetary policy. In the 2010s, the BSP has refined its policy tools such as through interest rate adjustments, open market operations and reduction in reserve requirements. New challenges have emerged in the aftermath of the global financial crisis; thus, requiring careful balancing between growth and inflation objectives. In the 2020s, the pandemic has posed unprecedented challenges, leading to economic contraction and volatile prices. The BSP has responded with significant monetary easing measures to support the economy while keeping an eye on inflation trends. The current policymaking approach incorporates digital transformation in financial sector regulation and efforts to promote sustainable finance. Second pillar: Financial stabilityThe central bank's supervisory approach has expanded from focusing solely on individual banks to encompassing the broader financial system. This shift has been driven by various internal and external factors such as economic crises, global trends, technological advancements and legislative changes. As a result, the central bank's role has evolved significantly to ensure the stability and integrity of the Philippine financial system.The CBP was established post-independence in 1949, primarily to stabilize the country's monetary system. Initially, the CBP's role in banking supervision focuses on individual banks, ensuring their solvency, liquidity and overall financial health. In the 1950s to 1960s, the CBP has developed regulatory frameworks, focusing on licensing, reserve requirements and inspections. The emphasis is still mainly on individual bank performance and regulation compliance. Under martial law, the government has implemented policies that have increased the centralization of economic decision-making, and the central bank has been instrumental in this process. This includes control over foreign exchange, regulation of banking activities and the supervision of credit. This period has been marked by political interference, which has affected the efficacy of banking supervision. Post-martial law, there had been a significant shift toward deregulation and liberalization in the banking sector. Laws such as the New Central Bank Act (Republic Act 7653) in 1993 has redefined the role of the CBP, officially renamed Bangko Sentral ng Pilipinas or BSP in 1993. This period has marked the beginning of the shift in supervision toward a more holistic, system-wide approach. The BSP has also begun to focus on the stability and soundness of the banking system rather than just individual entities. In the 2000s, the BSP has started aligning its regulatory framework with international standards, notably the Basel Accords, which focuses on risk-based supervision. Marking a significant shift from traditional, compliance-focused supervision, the risk-based approach emphasizes assessing the risk profile of banks and tailoring supervisory attention accordingly. Participation in the Financial Sector Assessment Program (FSAP), led by the International Monetary Fund and the World Bank, has further enhanced the BSP's focus on system-wide risks and macroprudential supervision. Compliance with the Basel Core Principles for Effective Banking Supervision is an important aspect of the FSAP.The 2007 to 2008 global financial crisis has led to further refinements in supervision, emphasizing systemic risk, stress testing and crisis management. With the advent of digital banking, the BSP has been adapting its supervisory frameworks to include cyber-risk management and financial technology innovations. Recently, there has been an increasing focus on sustainable finance and incorporating environmental, social and governance (ESG) factors into the banking supervision framework.Third pillar: Efficient payments and settlements systemThe approach to the payments and settlements system in the Philippines has transitioned from traditional, manual processes to a more sophisticated, integrated and digital framework. Moreover, from being the operator of the Peso Real-Time Gross Settlement (RTGS), the BSP is now mandated to oversee the National Payment System, and exercise supervisory and regulatory powers for the purpose of ensuring the stability and effectiveness of the monetary and financial system. Initially, the payments and settlements system in the Philippines has been predominantly manual and paper-based, involving physical cheques and cash transactions. The CBP, now BSP, has played a central role in overseeing and facilitating these transactions although the system used to be relatively rudimentary. In the 1990s, the Philippines has begun adopting electronic payment and settlement methods in line with global trends. Electronic fund transfer (EFT) systems have been introduced, providing more convenience and efficiency. In the 2000s, the BSP has initiated efforts to modernize the payments and settlements infrastructure to enhance efficiency, reduce risks and comply with international standards. The introduction of the RTGS system is a significant step, allowing for the immediate and final settlement of large-value interbank transfers. The 2010s had seen a diversification in payment services with the introduction of mobile banking, online transactions and various digital payment platforms. The BSP has strengthened its regulatory framework to ensure the safety, efficiency and reliability of these emerging digital payment methods. From the late 2010s to 2020s, the BSP has launched the National Retail Payment System (NRPS) framework to establish a safe, efficient and reliable retail payment system. This enables the launch of interoperable EFT facilities such as the Philippine EFT System and Operations Network (PESONet) and InstaPay. It has also enabled the establishment of QR PH, which is the national QR or quick-response code standard for payments.Key developments under the NRPS include PESONet for batch EFTs and InstaPay for real-time, low-value fund transfers. These developments aim to enhance financial inclusion by modernizing and making digital payments accessible to a broader segment of the population since digital payments serve as a gateway to financial inclusion.The pandemic has accelerated the shift toward adoption of digital payments, significantly increasing electronic payment transactions due to mobility restrictions and health protocols.The Project Agila, BSP's wholesale Central Bank Digital Currency project, is one of the major capacity building initiatives to ensure that the BSP is abreast of the fast-evolving technologies that drive the emergence of alternative payment instruments.The BSP seeks to modernize cross-border payments to make the country more competitive amid increasing globalization of trades and investments as well as growing tourism and manpower mobility. The BSP pursues both bilateral and multilateral approaches with focus on linking a fast payment system, InstaPay, with those of other countries in the Association of Southeast Asian Nations region.Current and future efforts include enhancing the sustainability of payment systems and strengthening cybersecurity measures to protect against digital fraud and cyber threats. BSP designates payment systems to protect public interest from systemic risks. To date, there are five payment systems, designated by the BSP, including Philippine Peso RTGS payment system, Philippine Domestic Dollar Transfer System, PhP-USD Payment vs. Payment System, PESONet and InstaPay. Pursuant to Republic Act 11127 or the National Payment Systems Act (NPSA), the BSP is not only empowered to own and operate payment systems; it also now has the authority to oversee the payment systems in the Philippines, and exercise supervisory and regulatory powers for the purpose of ensuring the stability and effectiveness of the monetary and financial system. BSP Circular 1049 on Registration of Operators of Payment Systems and BSP Circular 1089 on Payment System Oversight Framework are two of the implementing rules and regulations, issued by the BSP under the NPSA.