To encourage more interbank lending, the Bangko Sentral ng Pilipinas (BSP) will auction the overnight reverse repurchase (RRP) facility before 12PM beginning on May 29. In an advisory, the BSP said it will adjust the time of the RRP facility auction of 4:30PM to 5PM to its new time of 11AM to 11:30AM by next Monday as part of its efforts to improve its monetary operations. “With this refinement, the BSP intends to promote interbank lending activity throughout the day and encourage active liquidity management among counterparties,” said the BSP. It added that the “reconfiguration of the time of the RRP facility auction is an operational measure and remains in line with the current stance of monetary policy.” From May 29 and onwards, the bid submission will start at 11AM for the RRP facility. The interbank lending market is where banks borrow funds from one another for a specified term. Meanwhile, through the RRP, the BSP borrows money from banks using government securities as collateral. The RRP facility is part of BSP’s monetary operations to manage the amount of money circulating in the economy to achieve its inflation target. They do this by selling government securities with a commitment to buy them back at a later date. The RRP is a liquidity-absorbing operation. Currently, the overnight RRP is a fixed-rate facility. During an auction, bidders are awarded a portion of the total offer depending on their bid size. The minimum bid size is P10 million and the maximum is 20 percent of the offer size. The advisory came four days after BSP Governor Felipe M. Medalla announced that their long-term plan is to do away with rationing the RRP facility which is limited to P305 billion. When the offer exceeds this amount, the BSP proportionally ration the bids. “In the future, we will actually increase the auctions so that we don’t have to ration (the offer),” said Medalla. The BSP’s primary monetary policy instrument is the interest rate on its RRP facility. Since 2016, with the adoption of the interest rate corridor system, the BSP expanded its monetary operations with the addition of the term deposit facility and the securities facility. As of the first week of May, the BSP has mopped up P1.52 trillion of financial system liquidity through its liquidity facilities. The BSP securities absorbed about 30.9 percent or P470 billion of this amount while the TDF placements accounted for 29.2 percent or P443.4 billion. The overnight RRP accounted for 20.1 percent or P305 billion while the overnight deposit facility siphoned 20.1 percent or P301.8 billion. The BSP essentially removes money from banks to park these excess money with the BSP to earn fixed interest rates. By absorbing excess liquidity in the system, the BSP is able to control the rise in inflation. As of end-April, the average inflation is still high at 7.9 percent against the target of two percent to four percent. However, in the absence of any supply-side shocks, the BSP expects inflation to fall below four percent as early as September this year. The average forecast for 2023 is 5.5 percent and to further drop to 2.8 percent in 2024 due to negative base effects and possible decline in global oil and non-oil prices. On a quarterly basis, the BSP predicts inflation will average at 7.2 percent in the first six months this year, before dropping to 4.6 percent in the third quarter and back to the target at three percent in the last three months of 2023.