How Philippines is refining its tools to better fight inflation

After consumer prices in the Philippines soared at the fastest pace in more than a decade in January, the country’s central bank pursued more changes in the way it manages money supply to more effectively fight inflation and help spur economic activity.

Here’s what’s been done:

1. What is new?

The Bangko Sentral ng Pilipinas (BSP) this week will introduce more changes in its monetary operations after expanding in June the list of shorter securities that it’s issuing and the following month began accepting all bids for its overnight reverse repurchase facility, one of its main policy tools. BSP Governor Eli Remolona, who took office on July 3, has said the BSP has been working to establish a market-determined interbank overnight rate. The initiatives are aimed at sharpening its monetary tools and boosting its ability to guide short-term interest rates, which in turn influence longer-term rates and economic activity.

2. How is it going?

Inflation quickened again in August after easing to a 16-month low in July, putting pressure on monetary authorities to curb price risks further. The central bank raised its policy rate by 425 basis points from May 2022 to March 2023 in its most aggressive tightening cycle in two decades, and while it has held rates steady since May this year, Mr. Remolona has kept the door open to more rate hikes.

3. What is the underlying objective of the BSP’s initiatives?

The BSP wants to ensure that any changes in monetary policy will impact the financial market and the economy as intended. The more efficiently policy changes are reflected in the actual borrowing costs and investment returns, the more effectively the central bank can combat inflation. Low and steady inflation helps spur faster economic growth.

4. How is the BSP carrying out its initiatives?

With the passage in 2019 of amendments to The New Central Bank Act, the BSP can now issue its own debt securities as part of its instruments for monetary operations. It does so for its monetary policy implementation and liquidity management operations to steer short-term market interest rates toward the policy rate and influence money supply. Its other short-term policy tools include the term deposit facility, the overnight reverse repurchase facility, the overnight deposit facility and the overnight lending facility. The changes it’s been carrying out date back to the adoption of an interest rate corridor system in 2016. These changes are largely operational in nature and do not constitute any shift in the BSP’s monetary policy stance.

5. What are the recent refinements to BSP’s monetary operations?

There are several:

The central bank in June introduced the 56-day BSP bill to complement the 28-day tenor.
It aligned the schedule of the reverse repurchase paper facility with the other active instruments — the BSP securities facility and the term deposit facility.
It also switched to a full-allotment auction for the daily overnight RRP facility from a fixed-volume format. This gives the BSP flexibility to absorb changes in excess liquidity from the financial system.
The latest phase will be a change to a variable-rate auction from a fixed-rate format. The revised format, which takes effect Sept. 8, allows more room for interbank market price discovery and supports more money market activity.

With the shift to a variable rate auction, the BSP’s policy rate will be called the “target RRP rate,” which will be set after each meeting by the Monetary Board on the policy stance. A formal operational target, which is a market-determined, short-term interest rate that the BSP can guide on a day-to-day basis, will be called the “overnight RRP rate.”

Separately, the central bank is working to enhance the yield curve by helping increase government bond trading in the secondary market and adding more tenors in the curve. It wants the yield curve to be supported by actively traded marketable securities, with each tenor showing the prevailing yield in the market.

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6. What are the other upshots?

The changes enable the BSP to align its monetary policy implementation with the best practices in other parts of the world. The enhancements will encourage banks to borrow and lend in interbank markets, adding depth to money markets. A reliable pricing benchmark could emerge, which in turn will encourage bond issuance and trading that’s crucial in developing the country’s capital market. A more developed capital market could help attract much-needed funds for infrastructure projects. — Bloomberg