Philippine central bank plans to adopt interest-rate corridor framework next year

[MANILA] The Philippine central bank plans to use an interest-rate corridor framework in setting monetary policy starting next year to better manage liquidity in the financial system, a central bank official said on Tuesday.

Describing it as a "major reform" in policy setting, Bangko Sentral Deputy Governor Diwa Guinigundo told a business forum the interest rate corridor system will "align our open market operations with liquidity needs of the market and further strengthen the transmission channels of monetary policy." The system will make use of three separate interest rates to give the central bank greater flexibility in responding to the needs of the domestic economy.

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, will serve as the floor. The overnight borrowing or policy rate in the middle is currently at 4 per cent.

BSP Governor Amando Tetangco in an interview with Reuters on July 22 said authorities were discussing the operational aspects of the interest rate corridor framework, which he said will"guide money market rates closer to the policy rate." The framework will have to be approved by the central bank's policy-making Monetary Board. "All these processes will take time to complete and therefore next year might be a good time to start implementing the interest rate corridor," Mr Guinigundo said in a separate mobile text message.

The central bank, which next meets on August 13, is expected to keep its benchmark interest rate steady, mindful of risks posed by El Nino and market volatility driven by concerns over the external effects of any US Federal Reserve policy moves. "Monetary policy does not need to move in sync and in the same magnitude as the US Fed unless external adjustments impact domestic liquidity, foreign exchange, and affect the inflation outlook and financial stability adversely," Mr Guinigundo said.

REUTERS