The Bangko Sentral ng Pilipinas (BSP) will develop a money market tool by next month and launch it as an interbank rate by early December, according to its highest-ranking official.

BSP Governor Eli M. Remolona said late Tuesday, Aug. 22, that at the same time, the central bank is creating a credible yield curve with the Bankers Association of the Philippines (BAP) that will come from active trading tenors such as the 5- and 10-year. The original target date for the yield curve is January 2024 and Remolona is sticking to this schedule.

Meanwhile, the BSP chief said a benchmark short rate that they will come up with is similar to a market-determined, overnight (ON) interbank rate.

“If things work out – and we’re working with the open market committee of the BAP -- hopefully by early December we will have an interbank rate that is overnight and market-determined,” he said, partly in Filipino, in an interview with journalists Tuesday evening.

The BSP has not decided a name for it yet, but when its expanded open market tools are clearer, the policy rate will be called the target rate.

In addition, Remolona said the interbank rate will be the peso equivalent of the Secured Overnight Financing Rate (SOFR) which is an average rate used by the US to replace the discontinued London Inter-Bank Offered Rate or LIBOR.

The BSP first announced the creation of an ON reference rate and a yield curve last June. It will also shift to an auction-based reverse repurchase (RRP) facility in September, similar to the BSP bills.

The central bank is working on establishing a credible yield curve that is tenor-based, transactable and transparent.

Remolona said this is still a work in progress with the banks. If done correctly, this will deepen the domestic capital markets and provide yields for different tenors.  

Based on initial talks with BAP, the banks have committed to do more “serious” market making for the 5- and 10-year maturities.

Remolona said at this point, the 5-year yield is unknown or not determined, and they would want to close the gap between the “bid and ask” quotations.

He also noted that at the moment, the market-makers – these are banks and most are BAP members – are not really doing much market-making. Basically, a market-maker trades securities and other instruments and create a market for it by providing liquidity.

Remolona said banks have “promised” to discover a credible yield curve for at least two maturities “from across a whole range of maturities” and this will be the 5-year and 10-year tenors.

He has said previously that a workable yield curve represents liquidity at different maturities and to “fit a yield curve to yields” and “have something you can rely on.”

Both benchmark short rate and credible yield curve provide extra mechanism for the transmission of monetary policy.

Meanwhile, the BSP has published an ON reference rate on July 5. The new rate is based on the secondary market rate of the 28-day BSP bill and its ON equivalent.

The ON rate enhances the BSP’s RRP facility. Once the enhancements are fully completed, the new rate from the RRP facility will become the ON reference rate.

The BSP has started to accept all overnight RRP bids since July 14 via auction as it transitions from a fixed-rate fixed-volume to a fixed-rate full-allotment auction, and later to a variable-rate auction in September.