BSP tightens grip on money supply

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is taking a tighter grip on the supply of money circulating in the financial system to manage inflation by expanding the tenor of securities used to siphon off excess liquidity.

The central bank announced yesterday that it would start offering 56-day BSP bills on June 30 as part of its ongoing initiatives to enhance monetary operations under the Interest Rate Corridor (IRC) framework.

“The introduction of the 56-day BSP bill expands the range of BSP’s term instruments and increases the BSP’s flexibility to respond to changing liquidity conditions while providing additional guidance to short-term market interest rates,” the BSP said.

The move is in line with the plan of the BSP to lower the reserve requirement ratio (RRR) once the relief measure expires by the end of the month. The measure allows banks to count loans extended to micro, small and medium enterprises (MSMEs) as well as large enterprises not affiliated with conglomerates as part of the level of deposits banks are required to keep with the central bank.

The 56-day BSP bill, which is an additional tenor under the BSP securities facility, will be offered alongside the 28-day BSP bill.

The additional tenor will be offered through an auction to eligible counterparties, with the volume initially set in small amounts before being gradually scaled up as market liquidity conditions allow.

The initial offer volume for the 56-day BSP bill will be announced two days before the inaugural auction on June 30 consistent with current practice for the 28-day BSP bill.

“Its introduction supports the BSP’s efforts toward a more flexible and market-based approach to managing liquidity in the financial system, in line with its overall thrust to promote price and financial stability,” the BSP said.

BSP Securities are monetary instruments issued by the central bank for its monetary policy implementation and liquidity management operations to steer short-term market interest rates toward the policy rate and influence liquidity conditions in the financial system.

With the passage of Republic Act 11211 that amended RA 7653 or The New Central Bank Act, the BSP’s authority to issue its own debt securities as part of its instruments for regular monetary operations has been restored. Previously, the BSP was only allowed to issue its own debt securities when there are extraordinary movements in price levels.

The restoration of the BSP’s ability to issue its own debt securities provides the central bank with an additional monetary instrument for absorbing financial system liquidity.

The issuance of BSP securities complements the other short-term monetary policy tools used by the BSP to manage liquidity in the financial system, such as the term deposit facility, overnight reverse repurchase facility, overnight deposit facility and overnight lending facility.

The issuance of BSP bills provides the central bank with greater flexibility in managing the liquidity in the financial system, particularly in the face of large structural liquidity surplus arising from capital flows or additional liquidity released from the reduction in the reserve requirement ratios of banks.