Interest rate corridor takes off in early 2016 – BSP

MANILA, Philippines - The major policy reform of the Bangko Sentral ng Pilipinas (BSP) is set to take off in the second quarter of next year with the launch of the interest rate corridor (IRC) system to further enhance the country’s financial market operations.

In a press conference, BSP Governor Amando Tetangco Jr. said the IRC system would introduce key changes in the framework for monetary operations designed to enhance the effectiveness of monetary policy.

He said the changes would help improve the transmission of policy rate adjustments to relevant money market rates, and ultimately to key macroeconomic variables.

According to Tetangco, the two objectives for the adoption of an IRC system is to strengthen the signaling effect of policy rates and to provide a system that would allow easier price discovery particularly in the money markets.

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.

The BSP chief said the shift to the IRC does not represent a change in the BSP’s monetary policy stance, and is not expected to have a significant impact on the general level of interest rates in the Philippines.

In addition, he said the IRC is expected to support the development of Philippine capital markets by providing an enabling environment for increased money market transactions as well as promoting more active liquidity management by individual financial institutions.

Increased trading in money markets would also strengthen the price discovery process in money markets providing participants and monetary authorities alike with information on the true cost of and demand for liquidity in the financial system.