BSP to shift to interest rate corridor in June

MANILA, Philippines (UPDATED) – The Bangko Sentral ng Pilipinas (BSP) will shift to an interest rate corridor (IRC) system on June 3, adjusting downward its key policy rates.

BSP Deputy Governor Diwa Guinigundo said in a media briefing on Monday, May 16, that the new system will be officially launched on June 3. 

IRC is a system for “steering money market rates towards central bank’s target/policy rate,” Guinigundo added. (READ: BSP eyes bigger fines for banks violating anti-money laundering law)

The interest rates for standing liquidity facilities included in the IRC will be set as follows starting June 3:

• 3.5% in the overnight lending facility (a reduction of the interest rate for the upper bound of the corridor from the current overnight RP rate of 6%); 
• 3% in the overnight reverse repurchase rate (an adjustment from the current 4%); and 
• 2.5% in the overnight deposit facility (no change from the current special deposit account rate).

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

The country’s central bank said the IRC framework involves the establishment of the required infrastructure to effectively implement the monetary policy stance. 

Infrastructure requirements include two standing liquidity facilities – deposit and lending – whose rates will form a corridor around the BSP’s policy rate.

Guinigundo said this will be supported by auction-based monetary operations.

No change in monetary policy stance

The central bank clarified the shift to IRC does not represent a change in the BSP’s monetary policy stance.

The BSP also said this is not expected to have a significant impact on the general level of interest rates in the Philippines.

According to the BSP, the new system 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.”

In line with international central banking practice, the BSP said IRC will promote the establishment of more accurate interest rate benchmarks.

This, in turn, will help facilitate the “effective and efficient pricing of financial products in the domestic market.”

Over time, the BSP said the new system will help reduce the Philippines’ reliance on reserve requirement for sterilization purposes.

This will allow the BSP “to lower in the future the reserve requirements in line with regional norms.”

Reserve requirement is the amount of funds that banks must hold in reserve against deposits made by their customers. 

“The transition to the new interest rate framework is very timely in view of the current favorable inflation and output conditions,” the BSP said. – Rappler.com