THE CENTRAL bank is mulling over adjustments to current policy settings ahead of a major shift in the way monetary policy—which influences the cost of financing in the country—is conducted in the country.
With the Bangko Sentral ng Pilipinas (BSP) deep in preparation for the creation of an interest rate corridor system in the country, current inflation and liquidity conditions are being monitored to determine the need for tweaks to ensure stability in markets.
BSP Governor Amando M. Tetangco Jr. said the shift to the more potent corridor system in the second quarter of 2016 may lead to some short-term volatility in local markets.
“We will continue to monitor liquidity conditions, alongside any potential second round price effects, to see if there is a need to make adjustments ahead of the interest rate corridor implementation,” Tetangco told the Inquirer this week.
“We can expect some near-term volatility … but as market players become more familiar with how it works, we foresee a move toward convergence between market rates and BSP’s policy rates,” he said.
Consultations with local banks for the BSP’s implementation of the interest rate corridor commenced last Friday. Meetings with market players also took place Monday, Tetangco said.
The corridor system calls for a shift to the use of floor and ceiling rates for short-term financing. To keep rates in between these two preset rates, the BSP intends to conduct weekly auctions for term deposits. These auctions would be done every Tuesday starting the second quarter of 2016.
Tetangco said even if adjustments in policy rates were made ahead of the corridor’s implementation, these moves would be “operational adjustments” that would not reflect the stance of policy. “Our current view is that inflation should remain manageable over the policy horizon,” Tetangco said.
Amounts of deposit to be auctioned would be determined every week. Seven and 28-day deposit maturities would be on offer initially.
The interest rate corridor system aims to make policy settings set by the BSP more potent in controlling liquidity levels and inflationary pressures in the country.
This is in keeping with the BSP’s mandate of protecting consumers’ purchasing power by keeping prices stable.
Minutes of Friday’s meeting between the BSP and banks showed the main concern was the large difference in the benchmarks used by banks—which are used to price loans to the public—and rates set by the Monetary Board.
At its auction on Monday, the Bureau of the Treasury accepted bids for three-month T-bills at 1.773 percent, and six-month T-bills to 1.806 percent. Bids for one-year T-bills, which were last issued at 1.878 percent, were all rejected.
The BSP, meanwhile, allows banks to make short-term placements in special deposit accounts (SDA) at 2.5 percent across all maturities. Overnight borrowing and lending rate set by the BSP currently stand at 4 and 6 percent, respectively.
The BSP wants policy rates and government borrowing costs to be closer, but “the link has weakened due to an overabundance of liquidity,” said a banker who requested anonymity.