Bangko Sentral eyes 'rate corridor' to manage liquidity

After streamlining the rates of Special Deposit Accounts (SDA), monetary authorities are mulling over the use of a so-called interest rate corridor in managing liquidity in the financial system, the Bangko Sentral ng Pilipinas governor said late Friday. 

 

"Rationalizing the SDA pricing can also be seen as an intermediate step towards developing an interest rate corridor," said Bangko Sentral ng Pilipinas Governor Amando Tetangco Jr.  at the induction ceremony for the 2013 officers of the Economic Journalists Association of the Philippines (EJAP).

 

Citing favorable results experienced by the European Central Bank and Bank of Indonesia, the central bank chief said, "We are now carefully reviewing the interest rate corridor approach."

 

Last month, the policy-setting Monetary Board brought down the SDA yield to a single rate of 3 percent.

 

Banks park excess funds in SDAs, which the central bank use to mop up excess liquidity. The rates for SDAs were previously priced at a premium over the record low policy rates of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending. 

 

The interest rate corridor will allow the central bank to put a floor and ceiling for rates on long- and short-term funds, and tweak the range to better manage liquidity based on the what economy requires. 

 

"As the corridor is adjusted, banks would be discouraged from parking their funds with the central bank and prevent the central bank from crowding out the private sector," Tetangco said. 

 

The central bank chief said the Bangko Sentral has tapped the assistance of the International Monetary Fund (IMF). "We are engaging the IMF on a technical assistance to, among others, help us better appreciate the operational aspects of the corridor system," he noted. 

 

Tetangco said the move forms part of the central bank’s broader goal of managing capital inflows, which remain one of the risks facing emerging markets like the Philippines. 

 

"The biggest fireball we see in the horizon continues to be capital inflows—both the uneven surges and the potential of sudden stops and even reversals," he said. 

 

Tetangco noted "several possible meteorites falling out of this  fireball of capital inflows," such as "peso appreciation that could adversely impact dollar earners... the possible formation of asset price bubbles... [and] the cost to the BSP of maintaining price and financial stability."

 

Since it last lowered policy rates in October, the central bank has used macroprudential tools in managing capital flows, like raising the capital requirement for banks in positioning foreign exchange forwards and prohibiting non-residents from investing in central bank SDA. — VS, GMA News