Philippines: Central Bank holds rate in May and announces implementation of new interest rate corridor in June
May 16, 2016
At its meeting on 12 May, the Central Bank decided to leave the reverse repurchase rate (RRP) at 4.00%, as the markets had expected. The rate has been resting at this level since September 2014. The Central Bank also decided to leave the Repurchase Rate unchanged at 6.00% and to keep the interest rate on its special deposit accounts (SDA) at 2.50%. SDA facilities are fixed-term deposit accounts with maturities of between one week and one month that the Central Bank offers to credit institutions and bank trust entities. Moreover, the Bank kept the reserve requirement ratio steady. Following the decision, on 16 May, the Central Bank announced that it will implement a new interest rate corridor system starting 3 June and provided details about the new system.
The Central Bank explained that it held rates, “based on its assessment of a continuing manageable inflation environment.” Particularly, the Bank expects inflation to be within its target range of 3.0% plus/minus 1.0 percentage points this and next year and that inflation expectations are well-anchored. As for the Philippine economy, monetary authorities expect that GDP growth will remain dynamic, fueled by healthy private demand, robust lending, positive business sentiment and increased fiscal spending. The Bank assessed that the risks to the inflation forecast are somewhat tilted to the downside, mainly due to weak global growth and the lasting impact of low oil prices on consumer prices.
Regarding the switch from the current monetary policy structure to an interest rate corridor system, which will be implemented on 3 June, the Bank said that the adoption of the new system aims to make the transmission mechanism of monetary policy more effective. The new system is designed to ensure that money market rates are closer aligned to the Central Bank’s main policy rate, in order to improve the link between monetary policy settings and their impact on the real economy.
The new interest rate corridor system will be centered on a new purely overnight reverse repurchase rate, which will replace the current RRP as the main policy rate. This main rate will be set at 3.00%, which is down from the RRP’s current level of 4.00%. A symmetric and narrow corridor will be established around this rate. The overnight lending facility (OLF), which will replace the repurchase rate, will constitute the ceiling of the corridor and will be cut to 3.50%, down from the repurchase rate’s current 6.00%. Meanwhile, the overnight deposit facility (ODF) will establish the floor and the rate will be set at 2.50%, which is the current level of the SDA. On top of this, the Central Bank introduced a new instrument to absorb excess liquidity—the term deposit facility (TDF). The Central Bank pledged to, “calibrate carefully the volume of the TDF offerings to achieve a smooth transition to the new system.”