Under interest rate Corridor Banks swarm 1st BSP auction

MACTAN, Cebu, Philippines – Banks swarmed the first auction of the overnight reverse repurchase last Friday as part of the formal shift in monetary operations to an interest rate corridor (IRC) system, the Bangko Sentral ng Pilipinas (BSP) reported over the weekend.

BSP Deputy Governor Diwa Guinigundo said during the 12th Media Lecture Series that bids for the overnight reverse repurchase amounted to P574.07 billion last June 3.

Guinigundo said the BSP made a full award of P305 billion. “It was oversubscribed,” he added.

Banks are allowed to submit bids for the overnight reverse repurchase facility every day from 1:30 to 2 p.m. The minimum bid is P10 million while the maximum amount is 20 percent of the issue size.

On Wednesday, Guinigundo said the BSP would conduct the first auction for the term deposit facility wherein P30 billion worth of term deposits would be auctioned.

These include P10 billion worth of seven-day term deposits and P20 billion worth of term deposits.

Guinigundo said the BSP would initially offer a small amount of term deposits but would be increased gradually based on the daily liquidity forecast.

Guinigundo said term deposits are common tools used by central banks for liquidity management.

The facility allows central banks to withdraw the bulk of excess liquidity from the financial system and is suitable for shorter maturities due to their non-tradable nature.

Guinigundo said the BSP could opt to hold another auction for term deposits every Friday aside from the regular Wednesday schedule.

“Volume will be gradually scaled up to enable convergence of market interest rates to BSP policy or target rate,” he 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.

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.

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 effective last Friday.

The rate for the overnight deposit facility was unchanged at 2.5 percent.

The BSP reiterated the shift to the IRC system does not represent a change in the BSP’s stance of monetary policy.