ING Bank economist eyes cut in BSP’s policy rates vis-a-vis the planned IRC

Bangko Sentral ng Pilipinas (Central Bank of the Philippines). Wikipedia photo

MANILA – The benign inflation environment gives the Bangko Sentral ng Pilipinas (BSP) the leeway to implement its planned interest rate corridor (IRC) in the second quarter of 2016, an economist said.

ING Bank Manila senior economist Joey Cuyegkeng, in a research note, said a cut in the central bank’s lending rates is “likely” once the IRC is in place since this move is expected to be neutral.

He said the central bank “may target” a 100 basis points (bps) spread between its special deposit account (SDA) rate, which to date is at 2.5 percent, and the overnight lending rate, which is now at four percent. The overnight borrowing rate is currently at six percent.

“A one-time bid time cut is possible and is largely to be policy neutral since the effective policy rate for the market is the SDA rate which is likely to be untouched with the implementation of BSP’s IRC,” he said.

“To ensure policy neutrality, BSP may also opt to ease RRR in conjunction with its offering of term SDAs,” he noted.

The last time the central bank’s policy-making Monetary Board (MB) adjusted the BSP’s policy rates was in September 2014, when it was hiked by 25 basis points to prevent domestic inflation from surpassing the government’s three to five percent target for that year.

Monetary officials implemented a total of 50 basis points increase on its key rates in 2014 to keep inflation within target.

Under the planned IRC, two standing liquidity facility, namely deposit and lending, will serve as corridor for the central bank rates and these will be supported by auction-based monetary operations.

The BSP earlier said IRC is not expected to result to a change in the BSP’s policy stance as well as the general interest rate levels in the country and instead enhance the effectiveness of monetary policy.

“These changes will help improve the transmission of policy rate adjustments to relevant money market rates, and ultimately to key macroeconomic variables,” it said.

BSP considers the IRC as additional support to the domestic capital market “by providing an enabling environment for increased money market transactions as well as promoting more active liquidity management by individual financial institutions.”

It expected to lessen the country’s dependence on reserve requirement (RR) for sterilization, which in turn will help the central bank lower banks’ RR in line with regional levels.