Amando M Tetangco, Jr: Strengthening the monetary transmission
mechanism through the BSP's Interest Rate Corridor System
Speech by Mr Amando M Tetangco, Jr, Governor of Bangko Sentral ng Pilipinas (BSP, the
central bank of the Philippines), at the MOA Signing for the BSP's Interest Rate Corridor
System, Manila, 16 May 2016.
* * *
Magandang hapon sa inyong lahat! I am pleased to see all of you here at the signing of the
Memorandum of Agreement on the Monetary Operations System (MOS). Today's simple
signing ceremony is a milestone that ushers in a new framework for the way that the BSP
conducts its monetary operations.
Since we first broached the idea to the public in 2013, we carefully laid down the groundwork
for the adoption of the Interest Rate Corridor or the IRC this year. This included drawing up an
operational framework through consultations with the banking community; establishing the
MOS as an IT platform for auction-based monetary operations; and developing a model for
domestic liquidity forecasting to guide our daily monetary operations. In other words, years of
preparation culminate in today's MOA signing. And in a few weeks' time, on June 3, 2016,1 we
will bring these operational elements together to implement the IRC system.
Our motivation is simple. We would like to further strengthen the relationship between the
BSP's policy rates and money market interest rates. This, in turn, will enable the BSP to better
manage inflation and promote long-term sustainable growth. By providing an operating
framework for money market rates to move more closely with the BSP's policy rate, the IRC
will help enhance the link between the stance of BSP monetary policy and the real economy.
In order to establish the interest rate corridor, the BSP interest rates will be re-calibrated as
follows:
First, the current overnight RP rate of 6.0 percent will be reduced to 3.5 percent when the RP
window is converted to the overnight lending facility.
Second, the overnight RRP rate of 4.0 percent will be adjusted to 3.0 percent.
And third, the SDA rate of 2.5 percent will be kept steady when it is transformed to the overnight
deposit facility.
The new configuration effectively sets a ± 50 basis-point width around the BSP's policy interest
rate. While there is no international consensus on the appropriate width of the corridor, a
narrow corridor provides clearer guidance for the market and also helps to limit volatility in
short-term interest rates.
By introducing auction-type instruments, the IRC system is intended to ensure more equitable
access for all participants. In addition, we hope to ultimately aid in the development and
deepening of the country's capital and money markets. Over time, as more liquidity is absorbed
by the BSP, market participants will be encouraged to be more active and more prudent in
managing their own day-to-day and short-term liquidity positions. It is our hope that, in the
process, we will encourage counterparties to reduce their reliance on central bank facilities
and instead transact more with each other through interbank markets, in order to meet liquidity
requirements.
The more immediate benefit of the new auction-type instruments under the IRC is that the price
discovery process will be facilitated by the bids we receive from market participants, which will
provide information for the BSP and for the market on the prevailing cost of and demand for
liquidity. In turn, better price discovery will allow the industry to establish more accurate interest
rate benchmarks in the future.
Ladies and gentlemen, let me emphasize that the new IRC system is not a departure from the
BSP's current monetary policy framework. In fact, the IRC system is envisioned to further
support the inflation targeting framework by reinforcing the BSP's policy stance as represented
by the overnight reverse repurchase rate that will remain our key policy rate.
More importantly, the shift to the IRC system does not represent a change in the BSP's stance
of monetary policy. The IRC reforms are primarily operational in nature and will not materially
affect prevailing monetary policy settings upon implementation. At the same time, short-term
liquidity conditions are expected to remain broadly unchanged, as funds will continue to be
absorbed through monetary operations under the new IRC system.
Moreover, the rate adjustments in the BSP's instruments under the IRC system remain
consistent with the outlook for inflation and growth. Our current domestic environment of
manageable inflation, a stable financial sector and firm economic growth prospects affords us
the flexibility to implement these IRC-related reforms at this time.
The successful implementation over time of the IRC system will also allow for recalibrations in
other monetary policy tools, including possible adjustments in reserve requirements in line with
international norms.
Ladies and gentlemen, I have often said that while our mandate remains the same, the
environment in which we operate in remains dynamic and continues to evolve. We therefore
continue to rise up to the challenge of rethinking the status quo and finding ways to further
improve as a central monetary authority - a central monetary authority that promotes stability
and fosters sustained economic growth.
As we strive to constantly be better and to build on our strengths, we hope to be able to count
on the continuing support of the banking and financial sectors. Indeed, for our IRC system to
succeed, it is important that we move forward together and cooperate in making it work as
envisioned.
I am pleased therefore that we have with us today the Bankers Association of the Philippines
represented by its President Nestor Tan; the Money Market Association of the Philippines with
its President Raul Martin Pedro; the Investment House Association of the Philippines with its
President Manuel Tordesillas; the Trust Officers Association of the Philippines with its
President Angel Maria Pacis; the ACI Philippines, the Financial Markets Association
represented by its Treasurer Anthony Paul Yap; and the Chamber of Thrift Banks with its
President Rommel Latinazo.
I would challenge our industry associations to undertake your day-to-day liquidity management
more actively, to strive for greater participation in the interbank market and reduce reliance on
central bank facilities, and to continue efforts towards establishing appropriate price
benchmarks for financial markets.
Finally, we also thank the media for their continuing coverage that keeps us connected with
our stakeholders and our people.
Maraming salamat sa inyo.
Mabuhay ang ating mahal na bansang Pilipinas!
Mabuhay po tayong lahat!