BSP sets maiden sale of P30-B term deposits

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) is set to offer P30 billion worth of term deposits on June 8 as part of the formal shift in  monetary operations to an interest rate corridor (IRC) system early next month.

The central bank is set to auction P10 billion worth of seven-day and P20 billion worth of 28-day term deposits at the maiden auction of term deposits.

BSP Governor Amando Tetangco Jr. earlier said the primary aim of the adoption of the IRC starting June 3 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,” Tetangco said.

Aside from the term deposit auction facility, the IRC system would also consist of the overnight lending facility and the overnight deposit facility. The interest rates for the standing liquidity facilities form the upper and lower bound of the corridor while the overnight reverse repurchase is set at the middle of the corridor.

The overnight lending facility would replace the repurchase window while the overnight deposit facility would replace the special deposit account (SDA) window.

On the other hand, the reverse repurchase facility would be modified to a purely overnight reverse repurchase.

In addition, the term deposit auction facility would serve as the main tool for absorbing liquidity and would 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.

Earlier, Tetangco announced the adjustment of interest rates for these facilities starting June 3. The rate for the overnight lending facility was set at 3.5 percent instead of six percent while that of the overnight reverse repurchase rate was set at three percent instead of four percent.

The rate for the overnight deposit facility was unchanged at 2.5 percent or same as the SDA rate.

The new term deposit auction facility is expected to have a rate between that of the reverse repurchase and overnight deposit facility such that the weighted rate for monetary operations would 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.

According to Tetangco, the BSP would calibrate carefully the volume of the term deposit auction facility offerings to achieve a smooth transition to the new system.

Likewise, he explained the central bank might consider offering longer tenors on top of the seven- and 28-day term deposits in the future depending on the liquidity needs and preferences of the market.

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.

Over time, the implementation of the IRC system would also allow possible adjustments in reserve requirements in line with international norms.