• BSP to do liquidity forecasting for IRC

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    The central bank will be conducting liquidity forecasting to determine auction volumes once an interest rate corridor (IRC) system takes effect next year, a senior official said on Tuesday.

    “Depending on the numbers that will come out, it will be the volume that we are going to announce. It is going to be advanced so that the market will be given sufficient time,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa Guinigundo told reporters.

    “Initially, the auction . . . [will be]weekly but it is still subject to finalization. We consolidate the market reaction and the feedback . . . All of this will be subject to our liquidity forecasting,” Guinigundo added.

    Liquidity forecasting is one of the new measures the central bank wants to introduce under the IRC, which it said will also help reduce a reliance on reserve requirements (RR) for sterilization purposes, allowing monetary authorities to lower, in the future, reserve requirements in line with regional norms.

    This is also consistent with the BSP’s medium-term commitment to reduce the RR of central bank-regulated financial institutions and enhance financial intermediation.

    The transition to the new interest rate framework will be very timely in view of the current favorable inflation and output conditions, it said.

    Slated to start in the second quarter of 2016, the IRC will introduce key changes in the monetary operations framework to enhance policy effectiveness. The changes will help improve the transmission of policy rate adjustments to relevant money market rates, and ultimately to key macroeconomic variables.

    The IRC framework involves the establishment of the required infrastructure to effectively implement the monetary policy stance.

    Infrastructure requirements include two standing liquidity facilities—deposit and lending—whose rates will form a corridor around the BSP’s policy rate and will be supported by auction-based monetary operations.

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