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BSP plans major interest rate reform

With his term’s end nearing, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco Jr. will push for another major reform that could drastically change the way monetary policies are crafted in the Philippines.

Gears will start turning next year for the establishment of a so-called interest rate corridor, a mechanism that a senior official said would improve financial markets in the country and strengthen transmission channels of monetary policies.

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“The long-term reform agenda is a work in progress. We aim to boost the domestic money market, which in time will foster real price discovery and improve the intermediation of funds,” BSP Deputy Governor Diwa C. Guinigundo said on Tuesday.

An interest rate corridor will rely on two tools, likely the BSP’s overnight borrowing and lending rates. These stand at 4 and 6 percent, respectively. The yield for special deposit accounts (SDA)—2.5 percent today—may also be used.

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The overnight borrowing rate refers to the premium paid by the BSP for short-term credit from banks. The lending rate is what the BSP charges for overnight loans for banks. SDAs, meanwhile, allow banks to keep money in BSP vaults for longer periods of time.

These tools are used to manage the amount of money in the system, thereby ensuring the economy functions smoothly. The BSP’s main goal is to protect consumers’ purchasing power by keeping prices stable. This is done by managing the cost and amount of money circulating in the economy.

Under a corridor regime, a floor and ceiling rate will be set by the BSP, using either of the three rates. The goal is to have short-term interest rates moving between the floor and the ceiling. This ensures more stable prices in financial markets.

The reform, if implemented next year, will come a year before the lapse of Tetangco’s second term in office. Tetangco, graded as one of the world’s best central bankers by several international publications, became Governor in 2005. He is the first Philippine central bank head to serve two terms.

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TAGS: Amando Tetangco Jr., BSP, Diwa Guinigundo, monetary policies, Reform
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