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BSP pushes ‘rate corridor’

THE Bangko Sentral ng Pilipinas (BSP) is in discussions with the International Monetary Fund (IMF) in line with the potential establishment of an interest-rate corridor system, which is seen to guide short-term interest rates and promote transactions between banks, BSP Governor Amando Tetangco Jr. said on Friday.

Tetangco said in a speech before business journalists that the move forms part of the central bank’s broader goal of managing capital inflows, which he described as the “biggest fireball” on the horizon and continuing symptom of imbalances in the global economy.

The move toward an interest-rate corridor follows the rationalizing of access and pricing of the BSP’s special deposit accounts (SDAs), which now pays a 3-percent interest rate across all tenors, which is below the current policy borrowing rate of 3.5 percent.

“Rationalizing the SDA pricing can also be seen as an intermediate step toward developing an interest-rate corridor,” Tetangco said during the annual induction of officers and directors of the Economic Journalists Association of the Philippines (Ejap) in Makati City.

“We are now carefully reviewing the interest-rate corridor approach, given the successful experience of other central banks such as the ECB [European Central Bank] and Bank Indonesia,” he said.

The interest-rate corridor will allow the BSP to set an interest-rate floor and ceiling; the width of this band will be a policy decision of the BSP. A narrower band typically implies less volatility for short-term rates.

“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,” Tetangco said.  “We are engaging the IMF on a technical assistance to, among other things, help us better appreciate the operational aspects of the corridor system.”

Tetangco said that factors encouraging capital inflows remain broadly in place. Its effect on the domestic exchange rate, for instance, has led to the strengthening of the Philippine peso, eroding the earnings for exporters and outsourcing firms.

He reiterated that the BSP will continue to maintain “a strategic presence” in the currency market but added that the exchange rate would still be determined by market forces. He said the BSP is ready to put in place additional tools “to ensure that the exchange rate remains aligned with its fundamental value.”

The central bank already passed a higher risk weight on non-deliverable forward (NDF) transactions. It also placed caps on all NDF deals—20 percent of the capital of local lenders and 100 percent for foreign banks.

Tetangco said guidelines for “operationalizing” these caps are forthcoming but he noted that investors are exercising prudence when it comes to transactions in the NDF. He said the latest level of outstanding NDF transactions are currently just a fifth of the level in 2010, which saw record capital flows amounting to $15 billion.

Another effect of excessive inflows is the potential formation of asset-price bubbles but Tetangco said BSP data still did not indicate such a scenario. Still, the central bank continues to monitor movements here, in particular, those transactions funded by foreigners, he said.

“This is why the BSP expanded the reporting coverage of real-estate exposures of banks. The bank reports are expected to be received by end-March. We hope to see the results of analysis shortly after that,” Tetangco said.

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