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Manila Bulletin devider Business devider Banking & Finance devider BSP's RRP variable-rate auction starts Sept. 8

BSP's RRP variable-rate auction starts Sept. 8

Published Sep 4, 2023 08:23 am

At A Glance

  • The Bangko Sentral ng Pilipinas (BSP) on Sept. 8, Friday next week, will start its overnight (ON) reverse repurchase (RRP) variable-rate auction.
  • BSP will also introduce a market-determined rate for overnight funds and the ON RRP rate which is the operational target.
  • "(The) ON RRP rate should revert and move in line with the policy rate over time as the RRP auction size is adjusted with observed demand," says the BSP.
  • The BSP also clarifies that changes to the RRP facility are "largely operational in nature and do not constitute any shift in the BSP's monetary policy stance."

The Bangko Sentral ng Pilipinas (BSP) announced Monday, Sept. 4, that the overnight (ON) reverse repurchase (RRP) facility will shift to a variable-rate auction next week, Sept. 8, and will come up with a formal ON RRP rate as a result.

BSP Deputy Governor Francisco G. Dakila Jr. already indicated previously that they will conduct the new RRP auction this month. The shift is part of refining monetary operations for a more effective liquidity management.

A variable-rate format for the RRP will have a pre-determined offer volume, similar to the existing BSP securities facility or the BSP bill auction.

In a statement, the BSP said a variable-rate RRP auction format will result in a market-determined rate for overnight funds and the ON RRP rate.  

The ON RRP rate is the operational target. As explained by the BSP, 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.

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 BSP noted.

The BSP also said that the ON RRP rate is expected to move closely around the "Target RRP Rate” which is the key policy rate. The BSP will signal its monetary policy stance through this target rate. The RRP facility continues to be BSP's primary monetary policy instrument.

“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,” the BSP explained.

In addition, it said that 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.”

The BSP said it will continue enhancements and improvements to its conduct of monetary operations to not only strengthen the transmission of the monetary policy stance to the broader economy but to deepen the capital market as well.

The changes to the RRP facility is all part of reforms that BSP started in 2016 when it adopted the interest rate corridor (IRC) framework. The IRC is a system to bring short-term market rates closer to the BSP policy rate and ensures a fundamental basis for monetary policy transmission.

The BSP clarified that the changes to the RRP facility 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,” said the BSP.

Since July 14, the BSP has started to accept all overnight RRP bids, part of its open market operation enhancements.

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.

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.

As of Aug. 2 this year, the BSP has absorbed P1.52 trillion of domestic liquidity, of which only 22.4 percent or P340 billion was mopped up by the RRP facility.

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