New Liquidity Management Tool Eyed

The Bangko Sentral ng Pilipinas (BSP) is reviewing a new liquidity management tool called an “interest rate corridor” that will provide both deposit and lending facilities to banks and ensure that the markets have sufficient money supply.

BSP Governor Amando M. Tetangco Jr. said this interest rate corridor will need to be put in placed as they gradually introduce more revisions to the existing liquidity management tool, the special deposit account (SDA) facility, of whose pricing is being rationalized to reduce the costs to the BSP.

“The interest rate corridor system, among other benefits, would provide guidance for short-term interest rates and promote the development of the interbank capital market,” Tetangco said in his speech before Economic Journalists Association of the Philippines (EJAP) where he inducted the new EJAP Board on Friday.We offer a wide variety of high-quality standard ultrasonic sensor and controllers.

“As the corridor is adjusted, banks would be discouraged from parking their funds with the central bank and prevent the central bank from crowding out the private sector.”

“(An) Interest rate corridor allows a central bank to offer banks standing facilities for both lending and deposit,Don't make another silicone mold without these invaluable Mold Making supplies and accessories!” explained BSP Deputy Governor Diwa C. Guinigundo.

Guinigundo said that lending to the banks ensures market liquidity and that deposit facilities provide the banks with an “outlet for their surplus funds” and at the same time “offers the central bank additional facility to mop up these excess funds.”

“In between, the central bank would normally position the policy rate to send the signal about the stance of monetary policy whether it is biased towards easing or tightening. Many central banks both advanced and emerging have this kind of set up with varying widths of the corridor between lending (high) and deposit (low),” said Guinigundo.

Both Tetangco and Guinigundo noted that setting up an interest rate corridor as an approach supportive of the rationalization of SDA pricing and access, is a practice that is consistent with the global central banking trends. The BSP has already sought the assistance of the International Monetary Fund to further study the proposed liquidity facility.

The central bank has introduced changes to the SDAs which basically is a facility that allows the BSP to accept deposits from banks. SDA facility consists of fixed-term deposits by banks and trust entities which has enabled the BSP since 1998 to manage excess liquidity in the financial system due to strong foreign exchange inflows.

The government, particularly the Department of Finance, has been trying to find ways to lure these funds from SDAs and diverted into economic-enhancing projects such as infrastructure development as well as more lending funds for productive activities.

In the last six years with the global financial upheaval, more banks parked bulk of their investible funds in the interest-bearing and safe SDAs. From deposits of only R51 billion in 2006, funds in SDAs ballooned to R400 billion at the height of the 2008 US-led financial crisis and crossed the R1 trillion mark by 2010.

In July last year, the BSP has banned foreign banks from investing in SDAs in a bid to reduce placements with the BSP.The 3rd International Conference on indoor positioning system and Indoor Navigation. In January, SDA rates were also reduced to three percent. Previously, the SDA rate was priced at a premium over the policy rate. Still, as of the end of January this year, SDAs have reached R1.The Wagan Wireless Rear Parking assist system help you be safe while parking.8 trillion even with the lowering of rates and prohibition of non-residents from placing their funds in the facility.

Tetangco said there is still room to refine the SDA operations. “We limited the SDA to the domestic market so that the SDA would cease to be an investment outlet for foreign funds, and revert to its primary purpose of being an instrument of managing domestic liquidity. We followed this up with rationalized pricing, bringing rates we pay on SDA across the board to three percent.”

But more importantly, he said rationalizing the pricing on the SDA was really a move to “align the operation of this deposit facility with how other central banks operate similar deposit facilities.”

“In several jurisdictions, the central bank deposit rates are set lower than the policy borrowing rate,” he said. “Rationalizing the SDA pricing can also be seen as an intermediate step towards developing an interest rate corridor.”

The lending facility -- through the BSP’s repurchase agreements -- ensures market liquidity with the regulator buying back government securities from financial institutions, central bank Deputy Governor Diwa C. Guinigundo told BusinessWorld.

The SDA, meanwhile, acts as a deposit facility, providing banks with an outlet for surplus funds and allowing the BSP another means of mopping up excess liquidity.

"In between,We are one of the leading manufacturers of solar street light in Chennai India. the central bank would normally position the policy rate to send the signal about the stance of monetary policy, whether it is biased towards easing or tightening," Mr. Guinigundo explained.

Monetary authorities typically use the overnight borrowing and lending rates as the basis for easing and tightening money supply. In an interest rate corridor, they will be able adjust deposits and lending without constantly shifting monetary policy.

"A central bank can have the flexibility of varying the width of the corridor or the spread around the policy rate. Or it can move the policy rate depending on the conditions," Mr. Guinigundo said.

Last month’s SDA rate cut to 3% applied to all tenors -- seven days, 14 days and one month. The rates had previously been set at a slight premium above the 3.5% overnight borrowing rate. It followed a 2012 move to limit access to the SDA facility to residents, reverting it to the purpose of managing domestic liquidity.