The Bangko Sentral ng Pilipinas (BSP) announced today the formal shift in its monetary operations to an interest rate corridor (IRC) system starting 3 June 2016. The IRC is a system for guiding short-term market rates towards the BSP policy interest rate which is the overnight reverse repurchase (RRP) rate.
BSP Governor Amando M. Tetangco, Jr. said that the primary aim of the adoption of the IRC is to improve the transmission of monetary policy. 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.
The IRC system consists of the following instruments: standing liquidity facilities, namely, the overnight lending facility (OLF) and the overnight deposit facility (ODF); the overnight RRP facility; and a term deposit auction facility (TDF). 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 (RP) and Special Deposit Account (SDA) windows will be replaced by standing overnight lending and overnight deposit facilities, respectively. Meanwhile, the reverse repurchase (RRP) facility will be modified to a purely overnight RRP. In addition, the term deposit facility (TDF) will serve as the main tool for absorbing liquidity.
The interest rates for these facilities will be set as follows starting 3 June 2016:
- 3.5 percent 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 6.0 percent);
- 3.0 percent in the overnight RRP rate (an adjustment from the current 4.0 percent); and
- 2.5 percent in the overnight deposit facility (no change from the current SDA rate).
The shift to the IRC system does not represent a change in the BSP’s stance of monetary policy. The IRC reforms are primarily operational in nature and will not materially affect prevailing monetary policy settings upon implementation. In particular, the new Term Deposit Auction Facility is expected 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 interest rate at the floor of the corridor, where the bulk of the BSP’s liquidity absorption with the market currently takes place, is being kept steady at the launch of the IRC system. At the same time, short-term liquidity conditions are expected to remain broadly unchanged as funds will continue to be absorbed through monetary operations under the new IRC system. In conducting monetary operations, the BSP will calibrate carefully the volume of the TDF offerings to achieve a smooth transition to the new system.
To prepare for the start of IRC operations, placements in the SDA facility have been undergoing a winding down process. Outstanding term placements in the SDA window are now being allowed to mature without rollover in a phased manner to enable all existing term placements to be converted to overnight placements prior to the start of the auction-based operations under the IRC. At the same time, to pave the way for the use of auction-type facilities, an indicative auction calendar will be published via the BSP website on a quarterly basis for the guidance of market participants.
To implement the IRC system, the BSP also signed today a Memorandum of Agreement with the Bankers Association of the Philippines (BAP), Money Market Association of the Philippines (MART), Investment House Association of the Philippines (IHAP), Chamber of Thrift Banks (CTB), Trust Officers Association of the Philippines (TOAP), and ACI Philippines for the Monetary Operations System (MOS). The newly-launched MOS is a web-based electronic platform that enables counterparties to participate in the BSP’s new auction-type facilities under the IRC system. The MOS will replace the existing RRP E-Trading System which handles placements in the RRP facility.
The new IRC system is also seen to confer other benefits over time. It is expected to promote greater interbank market activity by encouraging banks to undertake their day-to-day liquidity management more actively as BSP monetary operations gradually exert a stronger influence on short-term liquidity conditions. Moreover, the offering of the TDF is expected to promote the establishment of benchmarks for short-term interest rates. Increased activity and better pricing in money market rates, in turn, are seen to help add depth to money markets and help develop the domestic capital market. Over time, the implementation of the IRC system will also allow possible adjustments in reserve requirements in line with international norms.
Quarterly schedule of Term Deposit Auctions for Q2 2016
The features of the facilities under the BSP’s IRC system are described in the attached primer on the Revised Framework for Monetary Operations.