The Bangko Sentral ng Pilipinas (BSP) will conduct a variable rate reverse repurchase (RRP) auction within the quarter or September at the latest, as part of refining monetary operations for a more flexible approach to managing liquidity in the financial system.
BSP Deputy Governor Francisco G. Dakila Jr. said the market will see a variable rate repo auction “very soon” and he confirmed the timeline could be next month August or September.
“It will be similar to the BSP bills auction,” he said. The central bank’s Securities Facility is transacted every Friday, and it has two tenors -- the 28-day and the new 56-day. The BSP bills was first introduced in September 2020.
Since July 14 this year, the BSP has started to accept all overnight RRP bids, part of its open market operation enhancements.
Dakila said the BSP has started its transition by accepting full auction bids for the RRP from a fixed-rate fixed-volume to a fixed-rate full-allotment auction. The last phase is to shift to a variable rate auction, likely by the end of the third quarter.
All of these improvements will result in a variable rate from the overnight RRP which is considered more responsive to changing market conditions.
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.
Basically, the RRP is a liquidity-absorbing operation. The main tool is the overnight RRP facility which is based on the BSP policy rate.
In ensuring that BSP is well-equipped against the impact of external shocks, especially to inflation, Dakila said these improvements to its monetary operations enhance the transmission of these instruments to market interest rates.
In particular, the overnight RRP reference rate which is now an allotment auction and later a variable rate repo, will give the BSP more influence over market rates.
Dakila said the BSP was previously constrained by its limited collateral because of the RRP cap, but since 2020 they have purchased a lot of securities that they can now use to accept all RRP bids.
Before July 14, the RRP facility auctions a pre-announced amount at a fixed rate and has a volume cap of P305 billion. As of end-March, the BSP holds more than P1.2 trillion of domestic securities. At the onset of the pandemic, to ensure liquidity, it has started to buy more securities.
The BSP has also adjusted the time of the RRP facility auction since May to promote interbank lending activity throughout the day and encourage active liquidity management among counterparties.
The interbank lending market is where banks borrow funds from one another. Through the RRP, the BSP borrows money from banks using government securities as collateral.
As of end-March this year, the BSP has absorbed P1.8 trillion of domestic liquidity, of which only 17 percent or P305 billion was mopped up by the RRP facility while the BSP bills accounted for 31.1 percent or P559.80 billion of the total absorbed liquidity.