Philippine central bank to use interest rate corridor system from Q2 2016

[MANILA] The Philippine central bank will start using an interest rate corridor from the second quarter of next year, its governor said on Tuesday, and use a new auction facility to try to guide market interest rates towards its main policy rate.

Bangko Sentral ng Pilipinas Governor Amando Tetangco said the policy-making Monetary Board approved the plan last week but authorities will consult the market before the mechanism is introduced next year.

The overnight lending or repurchase window, currently at 6 per cent, will serve as the ceiling and the special deposit account rate (SDA), currently at 2.5 per cent, as the floor of the rate corridor.

The influence of the overnight borrowing or policy rate in the middle, currently at 4 per cent, will be reinforced through the term deposit auction facility, which will allow banks to deposit money with the monetary authority for a short term, Mr Tetangco said. "This will increase the potency of the BSP's policy rate in guiding market rates given the dynamics of inflation and market conditions in the economy," Mr Tetangco told a gathering of fixed-income, currency and trust market associations.

Mr Tetangco also said the central bank has "policy space" in case it needs to act to steady domestic consumer prices and financial markets against fears of a China-led global slowdown and heightened volatility once the US Federal Reserve raises interest rates.

Mr Tetangco said the impact of a slowdown in China on other trading partners in Asia "bears watching." But he told local channel ANC on Monday he saw no need to adjust monetary policy at this point and the central bank may stay on hold for the rest of the year as inflation is likely to remain benign.

REUTERS