Price Stability On 3 June 2016, the BSP formally adopted an interest rate corridor (IRC) system as a framework for conducting its monetary operations. The IRC is a system for guiding short-term market rates towards the BSP policy interest rate which is the overnight reverse repurchase (RRP) rate. It consists of a rate at which the central bank (CB) lends to banks (typically an overnight lending rate) and a rate at which it takes deposits from them (deposit rate). In a standard corridor, the lending rate will be above the CB target/policy rate (thereby forming an upper bound for short-term market rates), and the deposit rate will be below the CB policy rate (thereby forming the lower bound). Related info: 1. Open Market Operations (OMO) The BSP offers standing liquidity (lending and deposit) windows to provide or absorb liquidity at the initiative of the counterparty. These standing overnight facilities are available on demand to qualified counterparties during BSP business hours. The two standing facilities that form the upper and lower bound of the corridor are set at ± 50 basis points (bps) around the policy rate (the overnight RRP rate under the new IRC structure). Monetary Operations
Monetary operations refer to the buying/selling of government securities, lending/borrowing against underlying assets as collateral, acceptance of fixed-term deposits, foreign exchange swaps, and the use of other monetary instruments of the Bangko Sentral aimed at influencing the underlying demand and supply conditions for central bank money.
An outright contract involves direct purchase/sale of government securities by the BSP from/to the market for the purpose of increasing/decreasing money supply on a more permanent basis. In such a transaction, the parties do not commit to reverse the transaction in the future, creating a more permanent effect on the banking system’s level of money supply.
Foreign exchange swaps refer to transactions involving the actual exchange of two currencies (principal amount only) on a specific date at a rate agreed on the deal date (the first leg), and a reverse exchange of the same two currencies at a date further in the future (the second leg) at a rate (different from the rate applied to the first leg) agreed on deal date.
2. Acceptance of term deposits
The BSP, like other central banks, offers term deposits as one of the monetary tools to absorb liquidity. In November 1998, the BSP offered the Special Deposit Accounts (SDA) to banks and later expanded the access in April 2007 to trust entities of banks and non-bank financial institutions. With the adoption of the IRC system in 2016, the SDA facility was replaced by the term deposit facility (TDF).
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The standing overnight deposit facility will absorb any residual system liquidity to prevent market interest rates from falling below the corridor. Interest rate for the O/N deposit facility is the RRP rate minus 50 bps (0.50 percentage point). The interest rate for the O/N deposit facility serves as a floor for the O/N interbank rate.
The standing overnight lending facility provides collateralized overnight funding to BSP counterparties to clear end-of-day imbalances. Interest rate for the O/N lending facility is the RRP rate plus 50 bps (0.50 percentage point). The interest rate for the O/N lending facility serves as a ceiling for the O/N interbank rate.
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