Proposed interest rate corridor IMF backs BSP’s monetary reform plan

MANILA, Philippines - The International Monetary Fund (IMF) has expressed support for the plan of the Bangko Sentral ng Pilipinas (BSP) to undertake major policy reforms to further enhance the country’s financial market operations. 

In its latest assessment on the Philippines after concluding its 2015 Article IV Consultation, the IMF said its executive board supports the plan of the Philippine central bank to implement an interest rate corridor to improve monetary policy transmission. 

BSP deputy governor Diwa Guinigundo earlier said the interest rate corridor system was part of the central bank’s long-term reform agenda, slated for implementation next year.

 “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,” Guinigundo said. 

The new system would boost the domestic money market and 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 four percent and the overnight lending rates at six percent since September last year. The SDA rate, on the other hand, is pegged at 2.5 percent. 

The IMF also welcomed the use of targeted prudential policies to limit financial excesses and strengthen resilience. 

It noted that more stringent prudential regulations might be needed should any systemic risk become apparent. 

The IMF is also pushing for the passage of the draft law that broadens the BSP’s financial stability mandate.