BSP setting up interest rate corridor system

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is set to adopt major reforms starting with the establishment of an interest rate corridor system to further enhance the country’s financial market operations.

BSP Deputy Governor Diwa Guinigundo told participants of the 7th Annual Corporate Treasury & CFO Summit – Philippines the interest rate corridor system is part of the central bank’s long-term reform agenda.

“By next year, the BSP will consider a major reform in the conduct of monetary operations. We are working on establishing an interest rate corridor system that will further align our open market operations with liquidity needs of the market and further strengthen the transmission channels of monetary policy,” he said.

According to Guinigundo, the new system would boost the domestic money market.

“We also aim to boost the domestic money market, which will in time foster real price discovery and improve intermediation of funds,” he said.

The new monetary policy tool would help better manage liquidity and interest rate volatility. The interest rate corridor is the difference between the overnight borrowing and overnight lending rates.

As early as 2013, the BSP announced it was looking at adopting an interest rate corridor as a monetary policy tool.

The overnight lending rates would serve as the ceiling of the interest rate corridor while the special deposit account (SDA) rate would serve as the floor.

The BSP has kept overnight borrowing rates at steady at four percent and the overnight lending rates at six percent since October last year. The SDA rate, on the other hand, is pegged at 2.50 percent.

Guinigundo said the monetary policy settings remain appropriate amid the country’s strong macroeconomic fundamentals that would allow the Philippines to withstand external shocks.

According to Guinigundo, the world continue to face the continuing uncertainty in the timing of the US policy normalization, the strengthening of the US dollar, and the persistently bleak global growth prospects.