BSP cuts policy rates for IRC shift from June 3

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The central bank on Monday cut its key policy rates effective June 3 as part of its shift to the Interest Rate Corridor (IRC) system.

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The IRC is a system for guiding short-term market rates toward the Bangko Sentral ng Pilipinas (BSP) policy interest rate, which is the overnight reverse repurchase (RRP) rate.

That headline rate will be adjusted to 3 percent starting June 3 from the current 4 percent.

Instruments under the IRC system consist of standing liquidity facilities such as the overnight lending facility (OLF) and the overnight deposit facility (ODF); the overnight RRP facility; and a term deposit auction facility (TDF).

The BSP explained that interest rates for the standing liquidity facilities form the upper and lower bound of the corridor, with the overnight RRP rate set at the middle.

IT added that the repurchase (RP) and special deposit account windows will be replaced by standing overnight lending and overnight deposit facilities, respectively.

The RRP facility, meanwhile, will be modified to a purely overnight RRP. The TDF will serve as the main tool for absorbing liquidity, it added.

BSP Governor Amando Tetangco Jr. said that in order to establish the IRC, the BSP interest rates will be recalibrated once the system takes effect on June 3.

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

And lastly, the SDA rate of 2.5 percent will be kept steady when it is transformed to the overnight deposit facility.

“The new configuration effectively sets a ± 50 basis-point width around the BSP’s policy interest rate. While there is no international consensus on the appropriate width of the corridor, a narrow corridor provides clearer guidance for the market and also helps to limit volatility in short-term interest rates,” Tetangco said during the signing of the memorandum of agreement on the Monetary Operations System (MOS).

Auction mechanism
The BSP explained that it would use an auction mechanism for the facilities to allow more market determined interest rates.

For the overnight RRP facility, there will be a daily auction using a fixed-rate and full-allotment method, where all bidders get a portion of the total offer depending on bid size, with announced anti-cornering rules.

The auction size for overnight RRP facility will be based on the BSP liquidity forecast with a time window of 30 minutes starting at 2 p.m. daily.

The minimum bid amount is P10 million, while the maximum bid amount is 20 percent of the auction size.

A once a week TDF auction, meanwhile, offers seven-day term deposits, using variable-rate, multiple price tenders through the MOS.

Pricing will be based on bids, while the size will be determined by the liquidity forecast.

Auction offer will be released two weeks ahead. Window time is 30 minutes starting at 10 a.m. with minimum bid amount of P10 million, and maximum bid amount of 20 percent of the auction size per tenor.

“By introducing auction-type instruments, the IRC system is intended to ensure more equitable access for all participants,” Tetangco said.

He added that the more immediate benefit of the new auction-type instruments under the IRC is that the price discovery process will be facilitated by the bids received from market participants, which will provide information for the BSP and for the market on the prevailing cost of and demand for liquidity.

“In turn, better price discovery will allow the industry to establish more accurate interest rate benchmarks in the future,” he said.

Nevertheless, the BSP governor emphasized that the new IRC system is not a departure from central bank’s current monetary policy framework.

In fact, he said, the IRC system is envisioned to further support the inflation targeting framework by reinforcing the BSP’s policy stance as represented by the overnight reverse repurchase rate that will remain its key policy rate.

More importantly, Tetangco stressed that the shift to the IRC system does not represent a change in the BSP’s stance of monetary policy.

“The IRC reforms are primarily operational in nature and will not materially affect prevailing monetary policy settings upon implementation. At the same time, short-term liquidity conditions are expected to remain broadly unchanged, as funds will continue to be absorbed through monetary operations under the new IRC system,” he said.

Moreover, the BSP chief said the rate adjustments in the BSP’s instruments under the IRC system remain consistent with the outlook for inflation and growth.

“Our current domestic environment of manageable inflation, a stable financial sector and firm economic growth prospects affords us the flexibility to implement these IRC-related reforms at this time,” he said.

“The successful implementation over time of the IRC system will also allow for recalibrations in other monetary policy tools, including possible adjustments in reserve requirements in line with international norms,” he added.

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