BSP eyes major changes in monetary policy

MANILA, Philippines—The Bangko Sentral ng Pilipinas is mulling over changes on the way it sets the monetary policy and has tapped the International Monetary Fund for technical assistance.

According to BSP Governor Amando Tetangco Jr., the central bank is interested in adopting what he calls the “interest rate corridor” system, which is expected to change the way banks manage liquidity and transact business.

Tetangco said the IMF would help the BSP in initiating the proposed system, which has been successfully implemented in Indonesia and the eurozone.

“Interest rate corridor” refers to the gap between an economy’s benchmark interest rates. In the case of the BSP’s overnight borrowing and overnight lending rates, the interest rate corridor, or gap, is 2 percentage points. It is the difference between the current overnight borrowing rate of 3.5 percent, and the overnight lending rate of 5.5 percent.

Whenever the BSP adjusts its key policy rates, whether it cuts or raises the overnight borrowing rate, the overnight lending rate is always adjusted by 2 percentage points.

Any adjustment to the country’s key monetary rates affects commercial interest rates, particularly of banks.

But under the interest rate corridor system, a central bank may adjust the gap between the maximum and minimum benchmark rates.

“We are carefully reviewing the interest rate corridor approach, given the successful experience of other central banks, such as the European Central Bank and Bank Indonesia,” Tetangco told reporters Friday during the induction ceremony for the 2013 officers of the Economic Journalists Association of the Philippines (EJAP).

If the interest rate corridor is narrowed, one possible effect is that banks may use more of their funds for lending and other investments, and discourage them to park the cash with the BSP.

The plan to adopt the interest rate corridor approach is part of the BSP’s ongoing effort to rationalize its policies, making these consistent with international trends.