Further scaling the local repurchase agreement market could improve the transmission of Bangko Sentral ng Pilipinas (BSP) monetary policy moves, as bank lending rates showed only a modest increase during the recent inflation-targeting policy tightening.

“Pass-through of the policy rate to bank lending rates is weak,” wrote Organization for Economic Cooperation and Development (OECD), a Paris-based intergovernmental group of mostly advanced economies, in its latest economic survey of the Philippines.

OECD said among the likely reasons for muted transmission is the “low pass-through of the policy rate to funding costs, as the interbank market continues to rely heavily on foreign exchange (FX) swap transactions.”

This means the local benchmark rate is influenced not only by domestic funding conditions but also by United States (US) dollar funding trends. “This reliance on foreign exchange swaps introduces volatility in interbank rates and weakens the direct link with the policy rate,” OECD explained.

Consequently, changes in lenders’ funding costs only slightly affect lending costs for households. This comes against the backdrop of household loan costs driven by credit risk premiums rather than funding costs.

Ultimately, OECD noted the “underdeveloped” status of the domestic repo market, with low standardization and liquidity, making it difficult to build a “reliable” short-term yield curve.

To enhance monetary policy transmission domestically, OECD suggested ramping up efforts to further develop the repo market.

Adopting the global master repurchase agreement and moving to full delivery of securities would standardize the repo market, reduce risks, and improve liquidity and price transparency, OECD said.

It also suggested widening participation to include fund managers and trust entities to further strengthen market depth.

Apart from improving the repo market, OECD also recommended improving the completeness and accuracy of borrower information in Credit Information Corp.’s (CIC) registry to help reduce credit risk premiums. If realized, banks’ lending rates could better reflect changes in funding costs.

Additionally, OECD said lowering reserve requirements and increasing awareness of options beyond bank deposits would help policy rate changes more effectively influence bank lending rates.

BSP Governor Eli M. Remolona Jr. earlier reported that repo transactions have surged from negligible levels around two years ago to approximately ₱100 billion to date.

Remolona expects this market to eclipse forex swaps as the primary tool for short-term liquidity this year, marking a shift toward global trading standards. “I think it won’t be long before it surpasses the FX swap market and makes the latter no longer necessary,” he said.