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Variable rate format for RRP may shorten monetary policy lag

The Bangko Sentral ng Pilipinas main office in Manila.

THE SHIFT to a variable rate auction format for the reverse repurchase (RRP) facility of the Bangko Sentral ng Pilipinas (BSP) may help shorten the lag whenever the central bank adjusts borrowing costs, an official said.   

BSP Deputy Governor Francisco G. Dakila, Jr. on Wednesday said the implementation of the Overnight (ON) RRP Rate and the shift to a variable rate auction format were largely operational and will not affect the BSP’s monetary policy stance.   

However, the reforms will boost the efficiency of the central bank’s market operations and enhance the implementation of monetary policy, he said.

“Hopefully, (the changes) will shorten (the response lag),” Mr. Dakila said in mixed English and Filipino, adding that the reforms may also help banks in pricing their products for consumers and other lenders.   

“If, for example, there will be a change in the BSP’s monetary policy and the BSP raised its policy rate, the move will have a larger effect in market interest rates because of the daily operations,” he said.   

Starting Friday (Sept. 8), the BSP will shift to a variable rate format for the RRP and introduce the ON RRP Rate, which is a market-determined short-term interest rate.

The BSP also changed the term for its key policy rate, currently at 6.25%, to “Target RRP Rate.”   

According to Mr. Dakila, the Target RRP Rate will be set by the Monetary Board in every policy review, but the ON RRP Rate will change every day based on the daily auction results.

“The ON RRP Rate can be based on the Target, or even higher than the Target. But our objective is for the ON RRP Rate to be close to the Target,” he said.   

Mr. Dakila said that the RRP in auction format, together with the BSP’s term deposit facility (TDF) and the BSP securities facility, or the BSP bills, will help the central bank gauge where markets are and how far they are to the policy rate.   

The Monetary Board hiked borrowing costs by 425 basis points (bps) to bring the key rate to 6.25% from May 2022 to March 2023. 

The response lag, also known as impact lag, is the time it takes for monetary policy to affect the economy once they have been implemented.

Mr. Dakila also said the influence of the BSP on market operations has been limited for a long time, since the RRP facility had a previous ceiling of P305 billion which is the amount that the central bank can hold in terms of volume of government securities.

“For a long time, the volume (for the RRP facility) is only fixed. Our influence on the market is limited. If we want to mop up liquidity, there is only a fixed amount. What we did was to introduce other instruments such as the TDF and the BSP bills, but the ON RRP rate will be adjusted daily,” he said.

However, since mid-July, the BSP started to accept all offers for the RRP facility, and the volume has been raised from P305 billion to more than P500 billion.

Lara Romina E. Ganapin, director of the BSP’s Department of Economic Research, said the central bank shifted to a variable rate auction format due to “available collateral” which it did not have previously.

“Because of some operations that we did during the pandemic, we were able to have enough collateral to pursue these reforms for the RRP facility,” Ms. Ganapin said.   

BSP Senior Assistant Governor Illuminada T. Sicat noted that even if the pandemic had not happened, the BSP is authorized by the BSP Charter to purchase and sell government securities. — Keisha B. Ta-asan

Neil Banzuelo

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