The Bangko Sentral ng Pilipinas (BSP) on Friday, Sept. 8, launched the variable-rate auction of its overnight (ON) reverse repurchase (RRP) facility to “discover” a formal ON RRP rate on a daily basis.
On its first day on Friday, the ON RRP rate was at 6.2358 percent, below the Target RRP rate of 6.25 percent.
The auction starts at 11:30am daily. The BSP will announce the volume an hour before the auction. The results of the auction will be released from 12:10pm onwards. This will be the ON RRP rate. The minimum bid amount is P10 million.
An auction format “will allow more room for interbank market price discovery,” said BSP Director Lara Romina E. Ganapin of the Department of Economic Research (DER) during the presentation of the “whys and hows” of the shift to an RRP auction.
Ganapin emphasized that under a variable-rate method, it is more market-determined, and the ON RRP rate will be useful for price discovery formation.
Since the auction will be on a daily basis, the BSP will effectively be releasing an excess liquidity forecast to the banks and other financial institutions.
The result is that a daily ON RRP rate will support money market activity.
Ganapin said starting Sept. 8, the BSP will be announcing an offer size based on excess liquidity forecasts while counterparties will submit bid rates and amount of tenders. This will help create a “well-functioning market” which will improve the “traction of monetary policy transmission”.
Meanwhile, the ON RRP rate will be an operational rate compared to the BSP policy rate, now called the Target RRP rate.
Ganapin said the operational rate is the market rate which will come up at each daily variable-rate RRP auction.
Basically, the ON RRP rate as a market rate is a relevant indicator of rates that the market use and because it is a variable-rate, it is a rate that the BSP can “guide reasonably well” meaning it does not deviate too much from the target RRP rate.
Since a variable-rate format for the RRP will have a pre-determined offer volume, it is now similar with the existing BSP securities facility or the BSP bill auction, and the term deposit facility.
As explained by the BSP, an operational target is a 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.
BSP Deputy Governor Francisco G. Dakila Jr. said 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.
He said BSP expects the operational target rate to move closely around the policy rate.
However, there will be some expected deviations as well to reflect changes in liquidity conditions from time to time, or when deviations from the liquidity forecasts occur.
Dakila said the ON RRP rate eventually will revert and move in-line with the Target RRP rate as the RRP auction size is adjusted depending on what the market needs or demand.
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.”
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 to help the inflation-targeting central bank manage price pressures.