BSP to implement changes in term deposit auction

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is considering additional operational refinements to its main liquidity absorption tool to strengthen the transmission of changes in the monetary policy stance to the rest of the economy.

Proposed changes in the term deposit auction facility (TDF) include further shortening the lead time in announcing the offer volumes and possibly increasing the frequency from the current one auction per week.

In June 2016, the central bank adopted the interest rate corridor (IRC) system as framework for conducting its monetary operations with the primary objective of enhancing monetary policy transmission.

This paved the way for the launch of the TDF to guide short-term interest rates toward the middle of the corridor which is the reverse repurchase rate of 3.5 percent from the overnight deposit facility rate of three percent and the overnight lending facility rate of four percent, or a narrow corridor of 100 basis points.

Prior to the launch of the IRC framework, there was an asymmetric and wide de facto corridor of 350 basis points.

The BSP has shortened the release of the details on the offer volumes per tenor one week before the scheduled auction instead of a two-week lead since the TDF was launched in June 2016.

“The aim of this refinement is to increase flexibility in determining the volume of offerings in the TDF in order to accommodate changing market conditions,” the BSP said.

Furthermore, its also started offering a 14-day tenor to augment the seven- and 28-day term deposits due to strong interest from banks.

The BSP is also looking at introducing scope to reallocate the total volume offer across the different tenors of the TDF.

The volume of the facility was initially pegged at P30 billion and increased gradually until it reached a peak of P180 billion in December 2016. The offer size is adjusted weekly depending on the liquidity forecasts and currently stands at P100 billion composed of seven days with P40 billion, 14 days with P40 billion, and 28 days with P20 billion.

“Varying the weekly TDF offer volumes affords the BSP with sufficient operational flexibility in taking into account recent developments in the money market when conducting monetary operations. Moreover, it would encourage active and dynamic liquidity management as banks will have to consider a broader range of volume and make more calibrated decisions on their bids,” the central bank said.

The regulator is also considering lengthening the reserve maintenance period from the current one-week cycle.

Furthermore, the BSP is also planning to transform the reverse repurchase facility to a variable-rate, variable-volume auction from a fixed-rate, fixed-volume auction.

“The continuous efforts of the BSP to refine its monetary operations are meant to enhance its capacity to guide short-term market interest rates to move closely with the BSP policy rate, and in the process, strengthen the transmission of changes in the monetary policy stance to the rest of the economy,” it said.

BSP Governor Nestor Espenilla Jr. had said the facilities have been effective in absorbing the P190-billion additional liquidity injected into the financial system with the 200-basis point reduction of the reserve requirement ratio in March and June.

“In fact, the liquidity releasing impact of the two previous RR cuts that we’ve done so far this year, is actually less than the liquidity draining impact of open market operations and our significant foreign exchange operations to manage excessive peso volatility in the face of external uncertainties. This has resulted in tighter financial conditions as evidenced by rising market interest rates,” he said.