BSP launches overnight reference rate as world drops LIBOR
MANILA, Philippines — The Bangko Sentral ng Pilipinas launched an overnight reference rate, which will serve as the market’s reference as the global economy continued to move away from using the London Interbank Offered Rate.
In a statement on Thursday, the BSP explained that this new rate uses the secondary market rate on the 28-day BSP bill to compute the equivalent overnight reference rate.
The LIBOR lost its luster in recent years, since figuring in a scandal in 2012. Back then, some banks manipulated the LIBOR to amass larger profits. This incident smeared the integrity of the benchmark interest rate.
As it is, the LIBOR is used by banks and institutions everywhere to set how much it costs them to borrow from each other. The rate is used to set the price for financial products such as mortgages and loans.
The LIBOR is nearing the end of its existence in global markets, compelling financial institutions everywhere to come up with viable replacements.
The BSP explained the overnight reference rate, albeit temporary, will be published on their website.
This initiative will kickstart the Philippine central bank to bolster its overnight reverse repurchase agreement facility.
These enhancements range from changing the auction window from 4 p.m. to 11 a.m., which the BSP said will encourage banks to actively manage liquidity.
The BSP added that the RRP facility auctions a pre-announced amount at a fixed rate.
Likewise, they explained that once the upgrades are baked in, the new rate from the RRP facility will become the new overnight reference rate.
The BSP, as it is, can either absorb excesses or augment gaps in market liquidity through its open market operations. That main function falls on the overnight RRP facility that is based on the policy rate, which currently stood at 6.25%.
“The expected result of these improvements is a variable rate from the ON RRP facility that would be more responsive to changing market conditions,” the statement read. — Ramon Royandoyan
- Latest
