BSP shifts to interest rate corridor system

The Bangko Sentral ng Pilipinas (BSP) has approved a shift to the use of an interest rate corridor, which will boost the potency of monetary policies in keeping consumer prices and economic conditions stable.

In a statement, BSP Governor Amando M. Tetangco Jr. said the new system for monetary policies was approved last week, and would be implemented by the middle of next year.

The new system will introduce key changes in the framework for monetary operations and was designed to enhance the effectiveness of monetary policies.

These changes will help improve the transmission of policy rate adjustments to relevant money market rates, and ultimately to key macroeconomic variables, the BSP said.

“Interest rate corridor is expected to support the development of Philippine capital markets by providing an enabling environment for increased money market transactions as well as promoting more active liquidity management by individual financial institutions,” Tetangco said.

Speaking to reporters, Tetangco said the new corridor would involve the establishment of weekly auctions for term deposits.

The interest for these deposits would be influenced by the rate at which the BSP lends and borrows money from banks.

The BSP’s main borrowing rate is the yield for special deposit accounts. Currently at 2.5 percent, the SDA rate represents the floor of the corridor.

On the other hand, the BSP’s repurchase or overnight lending rate, at 6 percent, will represent the corridor’s ceiling.

By conducting weekly term deposit auctions, where banks will bid for rights to keep money in the BSP for the short term, monetary authorities expect that liquidity would be mopped up from the economy more efficiently.

The BSP’s main task is to protect consumers’ purchasing power by keeping prices stable.

Tetangco clarified that the shift to the corridor would not represent a change in the BSP’s monetary policy stance, and is not expected to have a significant impact on the general level of interest rates in the Philippines.

Over time, the corridor system will also help reduce the country’s reliance on bank reserve requirements (RR) for sterilization purposes, allowing the BSP to lower in the future the reserve requirements in line with regional norms.