Beginning 08 September 2023, the Bangko Sentral ng Pilipinas (BSP) will shift to a variable-rate format with a pre-determined offer volume in the auction for the overnight reverse repurchase (RRP) facility.
These changes in the RRP facility are part of the BSP’s set of planned reforms dating back to the adoption of the interest rate corridor (IRC) framework in 2016. They are largely operational in nature and do not constitute any shift in the BSP’s monetary policy stance.
These initiatives are geared towards enhancing the transmission of monetary policy by strengthening the link between monetary policy strategy and implementation.
The shift to the variable-rate auction format will also help strengthen the price discovery process by providing market participants and monetary authorities alike a market-determined interest rate that conveys the prevailing cost of and demand for overnight funds in the financial system.
With these changes, the BSP further aligns its implementation of monetary policy with the best practices in other jurisdictions.
In executing this shift to a variable-rate auction format, two key changes will be implemented:
- The BSP’s monetary policy rate shall be called the “Target RRP Rate”.The BSP will signal its monetary policy stance through the Target RRP Rate. Similar to the prevailing practice, the Target RRP Rate shall be set after each meeting of the Monetary Board on the BSP’s monetary policy stance, and the RRP facility remains the BSP’s primary monetary policy instrument.
- The BSP will also be introducing a formal operational target, which will be called the “Overnight (ON) RRP Rate”. An operational target is a market-determined, short-term interest rate that central banks can guide on a day-to-day basis using their monetary instruments to reflect the prevailing monetary policy stance.
For the BSP, the shift to variable-rate RRP auction format will yield a market-determined rate for overnight funds, the ON RRP rate, that conveys the results of the daily RRP auctions. The ON RRP rate is an appropriate operational target given the regularity of RRP auctions as well as the market participants’ familiarity with the instrument.
The ON RRP rate is expected to move closely around the Target RRP Rate. Deviations of the ON RRP rate from the Target RRP Rate will reflect changes in liquidity conditions from time to time, or when deviations from the liquidity forecasts occur. Nevertheless, ON RRP rates should revert and move in line with the policy rate over time as the RRP auction size is adjusted with observed demand.
As the market familiarizes itself with the operational target, the ON RRP Rate will carry useful information on liquidity conditions and how they relate to the prevailing stance of monetary policy. Thus, the introduction of an explicit operational target will provide monetary authorities an important market-based indicator that can help in assessing the effective stance of monetary policy.
Moving forward, the BSP will continue to work towards enhancing the conduct of monetary operations to further financial market development and thus strengthen the transmission of the monetary policy stance to the broader economy.
