BSP to implement Interest Rate Corridor in June

The Bangko Sentral ng Pilipinas (BSP) on Monday announced it will be implementing its Interest Rate Corridor (IRC) system next month, in efforts to steer the money market towards central bank policy rates.

In a briefing in Manila on Monday, BSP Deputy Governor Diwa Guinigundo said that the new system will be officially launched on Friday, June 3.

According to BSP director of the Department of Economic Research Zeno Ronald Abenoja, the implementation of the IRC “will help improve monetary policy” and “help limit interest rate volatility.”

“With banks managing their liquidity better, there will be increased interbank market activity, which will strengthen price discovery process, add depth to money markets, and in the process help develop Philippine capital markets,” he said.

“Over time, IRC will allow reduction in reserve requirements,” he added.

The change in the system will also entail the conversion of the special deposit accounts (SDAs) and repurchase facility (RP) to overnight standing liquidity facilities.

The new system is expected to be fully implemented in the second quarter of the year, where Abenoja said that “active monetary operations will steer money market rates toward the central bank’s overnight borrowing or reverse repurchase (RRP) facility.

For his part, BSP Governor Amando M. Tetangco Jr. said that the IRC is a “milestone” that ushers in a new framework for the way that the BSP conducts its monetary operations.

The BSP, along with various banking and financial industry officials, on Monday afternoon signed the memorandum of agreement (MOA) on the new Monetary Operations System.

“Years of preparation culminate in today’s MOA signing. In a few weeks’ time, on June 3, 2016, we will bring these operational elements together to implement the IRC system,” Tetangco said.

Along with the implementation of the IRC, Tetangco also said that there will be adjustments on the key policy rates effective June 3:

The current overnight RP rate of 6.0 percent will be reduced to 3.5 percent when the RP window is converted to the overnight lending facility.

The overnight RRP rate of 4.0 percent will be adjusted to 3.0 percent

The special deposit accounts (SDA) rate of 2.5 percent will be kept steady when it is transformed to the overnight deposit facility.

This comes after the Monetary Board last week decided to maintain BSP’s key policy rates at 4.0 percent for overnight borrowing and 6.0 percent for overnight lending.

“The Monetary Board’s decision is based on its assessment of a continuing manageable inflation environment,” Tetangco said last week.

He cleared, however, that the shift to the IRC system does not represent a change in the BSP’s monetary policy stance.

“Let me emphasize that the new IRC system is not a departure from the BSP’s current monetary policy framework. In fact, the IRC system is envisioned to further support the inflation targeting framework by reinforcing the BSP’s policy stance as represented by the overnight repurchase rate that will remain our key policy rate,” he said. —KG, GMA News