Bangko Sentral ng Pilipinas said Monday it is shifting to an interest rate corridor system starting June 3, with an overnight reverse repurchase rate of 3 percent to guide short-term market rates.
IRC is a system for guiding short-term market rates toward the BSP policy interest rate which is the overnight reverse repurchase or borrowing rate.
Tetangco said under the IRC, the interest rate for overnight lending facility would be 3.5 percent, a reduction from the current 6 percent while the rate for overnight borrowing facility would be reduced to 3 percent from 4 percent. The special deposit account rate would be kept at 2.5 percent.
“The expectation is that once we implement this, the interest rates for term deposit auction would be more or less between the policy rate and deposit rate. But we are not going to determine that, the market will determine that,” Tetangco said at the sidelines of the signing ceremony between Bangko Sentral and banks and trust entities.
“ We will have a weekly auction and the amount to be determined by the liquidity forecast…. the auction will be held every Wednesday,” Tetangco said.
Bangko Sentral Deputy Governor Diwa Guinigundo said the bank would initially start with seven-day and 28-day tenors for the term deposit auction.
Guinigundo said the auctions would likely be small in the beginning in line with planned gradual implementation of system’s related reforms. He said the volume would be scaled up to enable convergence of market interest rates to policy and target rates.
“The tenor will depend on market conditions but we will start at seven to 28 days maturity… The decision to go higher [in mopping up liquidity] maybe driven by actual monetary conditions..,” Guinigundo said.
He said the impact of term deposit facility on market rates would increase as volume of offerings rose.
“Banks now need to program or manage their liquidity… we see more transactions in the market, pricing discovery will be enhanced, and we see a better prospect for a capital market development in the future,” Guinigundo said.
Tetangco said the IRC system did not represent a change in stance of monetary policy. IRC reforms are operational in nature and will not affect materially prevailing policy settings upon implementation, he said.
The term deposit auction facility is seen to have a rate between that of the RRP and overnight deposit facility such that the weighted rate for monetary operations will remain broadly the same.
Moreover, the rate at the floor of the corridor, where the bulk of the BSP’s liquidity absorption with the market currently takes place, was kept steady at the launch of the system.
Tetangco said the primary aim of the adoption of IRC was to improve the transmission of monetary policy. He said by helping ensure that money market rates move within a reasonably close range around the BSP’s policy rate, the IRC helps to enhance the link between the stance of BSP monetary policy and financial markets and, thereby, impact the real economy.
IRC system consists of standing liquidity facilities such as the overnight lending facility, the overnight deposit facility, the overnight RRP facility and a term deposit auction facility.
The interest rates for the standing liquidity facilities form the upper and lower bound of the corridor while the overnight RRP rate is set at the middle of the corridor.
The repurchase and special deposit account windows will be replaced by standing overnight lending and overnight deposit facilities, respectively. Meanwhile, the reverse repurchase facility will be modified to a purely overnight RRP. In addition, the term deposit facility will serve as the main tool for absorbing liquidity.
