The Bangko Sentral ng Pilipinas (BSP) Monday said it would start to implement the interest rate corridor starting June 3, in a bid to limit volatility by steering money market rates toward the key policy rate.
In this regard, the BSP would also implement on the same day cuts in the overnight lending facility—the upper bound of the corridor—to 3.5 percent from the current overnight lending rate of 6 percent, as well as in the overnight borrowing or policy rate to 3 percent from 4 percent at present, BSP Governor Amando M. Tetangco Jr. said.
The overnight deposit facility or current SDA rate of 2.5 percent, meanwhile, would be kept, Tetangco added.
This will result in a 100-basis point width around the BSP’s policy interest rate—a narrower corridor which Tetangco said “provides clearer guidance for the market and also helps to limit volatility in short-term interest rates.”
BSP Deputy Governor Diwa C. Guinigundo clarified that the rate adjustments were operational, hence policy neutral.
Tetangco said they expected the new term deposit auction facility (TDF), which will serve as the main tool to absorb liquidity, to have its rate settle between the SDA and policy rates, or between 2.5 and 3 percent.
Under the TDF will be offerings of seven- and 28-day term deposits, which will be auctioned using variable-rate, multiple-price tenders through the BSP’s Monetary Operations System (MOS). The MOS is the IT platform to be used for the auctions, which would initially be held weekly on Wednesdays, but could be expanded to two days a week, Guinigundo said, as “the initial small volume can be expanded overtime.”
“By introducing auction-type instruments, the interest rate corridor system is intended to ensure more equitable access for all participants. In addition, we hope to ultimately aid in the development and deepening of the country’s capital and money markets. Over time, as more liquidity is absorbed by the BSP, market participants will be encouraged to be more active and more prudent in managing their own day-to-day and short-term liquidity positions,” Tetangco said.
“It is our hope that, in the process, we will encourage counterparties to reduce their reliance on central bank facilities and instead transact more with each other through interbank markets, in order to meet liquidity requirements,” the BSP chief added.
According to Tetangco, “the more immediate benefit of the new auction-type instruments under the interest rate corridor is that the price discovery process will be facilitated by the bids we receive from market participants, which will provide information for the BSP and for the market on the prevailing cost of and demand for liquidity,” which would also result in better price discovery allowing the industry to establish more accurate interest rate benchmarks moving forward, he said.