[MANILA] The Philippine central bank will make the transition to an interest rate corridor (IRC) system starting on June 3, in a move to improve monetary policy transmission to the broader economy, senior officials said.
Operational details would be given later on Monday, the officials said. Under, the IRC framework, the overnight lending or repurchase window will serve as the ceiling and the special deposit account rate (SDA) as the floor of the rate corridor.
The key overnight borrowing rate will be in the middle. "We are making transmission of monetary policy more effective," Diwa Guinigundo, Bangko Sentral ng Pilipinas deputy governor, said.
The corridor "has to be sufficiently narrow to provide effective guidance to market," Zeno Abenoja, a director at the central bank, told a media briefing, but he reiterated the changes will be policy neutral.
Central banks in Asia's emerging markets are introducing new policy tools to get lenders to cut borrowing costs and make credit flow more quickly through their slowing economies.
In setting the corridor, the BSP will likely cut the overnight borrowing rate to 3.5 per cent from 4.0 per cent, while the lending rate will be reduced to 4.5 per cent from 6.0 per cent and the SDA rate kept at 2.5 per cent, said Nicholas Mapa, economist at Bank of the Philippine Islands.
The influence of the main overnight borrowing rate will be reinforced through the term deposit auction facility, which will be used to mop up liquidity in the banking system to guide market rates closer to it, officials said.
The auction will be conducted once or twice a week and will offer 7-day and 28-day term deposits.
On Thursday, the central bank, expecting economic growth to remain strong after the country's leadership change, kept its benchmark interest rate steady at 4.0 per cent, where it has been since September 2014.