The Bangko Sentral ng Pilipinas’ (BSP) massive liquidity-enhancing activities during the height of the pandemic has changed the way it conducts market operations, especially its overnight (ON) reverse repurchase (RRP) facility and its build-up of collateral in the form of government securities (GS), affording it more influence in guiding market rates.
The BSP has recently announced that it will start a long-planned variable-rate auction format for the RRP to get a daily ON RRP Rate which will be closer to the BSP policy rate, now called the “Target RRP Rate”. They were able to do this because of its increased GS holdings.
In a press briefing on Wednesday, Sept. 6, BSP Deputy Governor Francisco G. Dakila Jr. said the pandemic or the Covid crisis which hit the globe in February-March 2020 has “speed up” the process of shifting from a fixed-rate, fixed-volume RRP facility to an auction-based transaction starting this Friday, Sept. 8.
Dakila, speaking to reporters in a mix of Filipino and English, said the BSP has been trying to find ways to “remedy the constraints” of having “available collateral to support the RRP facility.”
For years, the RRP facility has a ceiling of P305 billion because that is the amount that BSP can only hold in terms of GS volume.
The RRP facility is capped by that amount and it has a fixed interest rate. But since mid-July this year, the BSP started to accept all offers for the RRP facility, and the volume has increased from P305 billion to more than P500 billion.
Dakila said the RRP in auction format, along with the weekly auction of two other market operations such as the term deposit facility and the BSP securities facility will help BSP to get a better gauge of where market rates are, and how far or close they are to the BSP policy rate.
From 2020 to 2021, the BSP has injected about P2.2 trillion liquidity into the financial system. The big bulk of that came from BSP’s participation in the GS market.
By mid-2021, the BSP has P1.38 trillion stock of debt securities. The central bank’s GS purchases in the secondary market accounted for six to seven percent of GDP.
Domestic securities as part of BSP’s total assets as of end-March 2023 amounted to P1.297 trillion compared to only P225.52 billion in March 2020 which was before the world declared a global pandemic.
BSP Senior Assistant Governor Illuminada T. Sicat said however that even if the pandemic had not happened, they are authorized by the BSP Charter to purchase GS and to buy and sell GS.
She said they did not invoke it because in 2019, when the BSP law was revised, they restored their ability to issue their own securities.
“We can still purchase, buy and sell securities so even without pandemic, we can build our own inventory of GS,” said Sicat.
As early as 2012, and then again in 2015, the BSP has had talks with the industry in developing an RRP facility through more collateral and to set it up as the real effective rate in the open money market.
Back then, 10 years ago, to expand the RRP market, the BSP needed additional collateral. The BSP borrows and lends to banks using GS as collateral. Money market instruments such as the RRPs are short-term trades and done through interbank lending and borrowing.
Developing the RRP further as an auction format is part of the interest rate corridor system that BSP first adopted in 2016.
By using the option to auction RRPs, the BSP will use its ON RRP rate in coming up with the benchmark yield curve. The BSP is targeting to have a credible yield curve by the end of 2023 or early next year.