IMF backs new framework

A “CORRIDOR” framework of monetary policy will enable the Bangko Sentral ng Pilipinas (BSP) to better manage liquidity and interest rate volatility, the International Monetary Fund’s (IMF) representative in the country said last week.

“Most central banks maintain interest rates within some range around their policy target rate using a corridor system,” IMF Resident Representative Shanaka Jayanath Peiris said via e-mail.

The interest rate corridor — currently under study by the BSP, aided by technical assistance from the IMF — will make use of three rates to manage liquidity, he explained.

On one end of the corridor is the overnight lending rate of 5.5%. The BSP can inject liquidity into the market through its lending facility, as it repurchases government securities from banks. On the other end is the special deposit account (SDA) rate of 3%. The BSP mops up liquidity by allowing banks to park their excess funds in this facility.

The policy rate — the overnight borrowing rate of 3.5% — will be in the middle of the corridor, signaling the stance of monetary policy towards inflation and economic growth.

The central bank will constrain interest rates through the corridor, Mr. Peiris said, as it offers to take an unlimited amount of deposits through the SDA and lend out funds with collateral through overnight lending.

“Open market operations are used to inject or withdraw liquidity in order to guide market overnight rates within the corridor through time,” he explained.

“Appropriately designed and implemented, corridor systems help maintain rates at a level consistent with the desired stance of the central bank while also helping manage short-term interest rate volatility.”

The BSP monitors liquidity as too much money in the financial system can stoke prices of consumer goods.

It aims to keep inflation within 3-5% this year, with a forecast of 3%. Annual inflation rate picked up to a five-month-high 3.4% last month, taking the year-to-date rate to 3.2%.

The IMF concluded its technical study mission with the BSP last week, Mr. Peiris said. The final report on the interest rate corridor should be released in “a few weeks.”

The BSP first broached the idea of the corridor in February, following its move to bring down the SDA rate to 3%. It was previously priced at a premium over the policy rate of 3.5%.

“[R]ationalizing SDA pricing can also be seen as an intermediate step towards developing an interest rate corridor,” BSP Governor Amando M. Tetangco, Jr. had said.

“We are now carefully reviewing the interest rate corridor approach,” he added, citing “the successful experience of other central banks” like the European Central Bank and Bank Indonesia.

Talk of another SDA rate cut is on the table, as the BSP chief recognized there was still “room to refine the operations” of the facility.

There are an estimated P1.8 trillion parked in SDAs, and the central bank has been keen to push out these funds into the financial system.

With more money in the market, officials hope that it can encourage consumption and investment, which in turn can support the economy amid the global slump. –Diane Claire J. Jiao, Senior Reporter, Businessworld
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