Shift to interest rate corridor eyed in April

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is looking at shifting to an interest rate corridor (IRC) system as early as April this year.

“We are looking at April. We will announce in one or two weeks and then we will launch it,” BSP Deputy Governor Diwa Guinigundo said.

Monetary authorities are expecting short-term volatility ahead of the proposed changes in the framework for monetary operations designed to enhance the effectiveness of monetary policy.

Guinigundo earlier said there could be some volatility due to the migration of funds from the special deposit account (SDA) facility to higher yielding term auction deposit facility under the IRC system.

“There will be some volatility but the difference of the interest rates between SDAs and term auction deposit facility will be minimal,” he said.

The IRC system calls for the shift to the use of floor and ceiling rates for short-term financing to be determined through the auction of seven and 28-day deposit maturities initially set at once a week.

The BSP official reiterated the auction to be conducted by the BSP would not compete with the auction of Treasury bills and Treasury bonds being conducted by the Bureau of Treasury.

The IRC would help improve the transmission of policy rate adjustments to relevant money market rates, and ultimately to key macroeconomic variables. It would strengthen the signaling effect of policy rates and provide a system that would allow easier price discovery particularly in the money markets.

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 would form a corridor around the BSP’s policy rate, and would be supported by auction-based monetary operations.

The BSP has clarified the shift to the IRC does not represent a change in the BSP’s monetary policy stance, and is not expected to have a significant impact on the general level of interest rates in the Philippines.

In addition, the IRC 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.

Increased trading in money markets would also strengthen the price discovery process in money markets providing participants and monetary authorities alike with information on the true cost of and demand for liquidity in the financial system.

It would promote the establishment of more accurate interest rate benchmarks that will help facilitate the effective and efficient pricing of financial products in the domestic market.