BSP eyes better liquidity control with its debt securities held by more banks

MANILA, Philippines—The central bank may expand the existing set of eligible market participants that have access to its bills and bonds, a scheme that, depending on the need, could make the instrument more effective in controlling inflation or promoting economic growth.

“We continue to study the features of the BSP securities to enhance its market-friendly features and make it at par with other available assets in the market,” Bangko Sentral ng Pilipinas Governor Benjamin Diokno said at an online briefing.

“Consultations are being conducted to gather further insight on market views and preference,” he said.

“This is consistent with the objective of providing greater guidance to short term market interest rates under the Interest Rate Corridor (IRC) framework to improve the transmission of the BSP’s monetary policy,” he added.

The tenor, or period of maturity, volume and frequency of issuance of the BSP securities will remain guided by the agency’s assessment of market developments and liquidity conditions and discussions with central bank counterparties.

The BSP securities are envisioned to be the central bank’s primary instrument in managing financial liquidity that are structural in nature. When the central bank wants to rein in inflation, it can reduce the amount of cash circulating in the local financial system by selling more debt securities to banks. Conversely, when it wants to promote economic growth during a period of low inflation, the central bank can buy back these debt securities, thus releasing more cash to financial institutions in the process.

Since its launch in September 2020, market interest for the BSP bills has remained strong as characterized by the consistent oversubscriptions in their weekly auctions.

According to Diokno, the addition of the securities as a monetary operation tool under the IRC framework “has provided the BSP with greater flexibility in managing financial system liquidity.”

Adding BSP securities to “standard monetary operations”, the the central bank said last year, “provides an additional instrument for managing liquidity in the financial system.” It also supports “implementation of monetary policy” under IRC.

The agency reiterated that the issuance of debt securities does not represent a change in monetary policy stance.

The BSP’s authority to issue its own debt securities as part of its instruments for regular monetary operations was restored by Republic Act No. 11211, which amended the New Central Bank Act of 1993.

Previously, the BSP was allowed to issue only its own debt securities in cases when there are extraordinary movements in price levels. The restoration of the BSP’s power to issue its own debt securities provided it with an additional monetary instrument to absorb financial system liquidity.

TSB