‘Variable-rate RRP to mop up liquidity better’


SHIFTING to a variable-rate Reverse Repurchase (RRP) facility auction format will allow the Bangko Sentral to better mop up excess liquidity in the market, according to central bank officials on Wednesday.

In a briefing, BSP Deputy Governor Francisco G. Dakila Jr. said the challenge prior to this shift is that the BSP can only accept a volume of P305 billion using the RRP.

However, with the shift, Senior Assistant Governor Iluminada T. Sicat said the shift will allow the BSP to accept liquidity volumes in excess of this amount. “With that [P305 billion], the influence on the market is limited, [we can only] mop up liquidity up to that amount,” Dakila explained, partly in Filipino.

While there are other ways to mop up liquidity such as the Term Deposit Facility (TDF), these have 7- to 14-day tenors. What is missing now is the overnight (ON) benchmark rate, which the ON RRP rate meets, said Dakila.

But more than the challenges, the shift allows the BSP to take advantage of the opportunities according to Department of Economic Research Director Lara Romina E. Ganapin.

During the pandemic, the BSP bought a lot of government securities. This allowed the central bank to have an available collateral for this kind of facility.

However, even without the pandemic, this has already been in the pipeline for the BSP. Dakila said the pandemic only fast-tracked the creation of the facility.

“The ON [presents an] opportunity given the large liquidity. We have to manage daily liquidity,” Ganapin said.

With the shift, the BSP’s policy rate will be renamed the Target RRP rate. The rate will remain part of the monetary policy strategy of BSP and has a medium- to long-term orientation.

The rate will be the “ultimate objective” and the intermediate target/nominal anchor as well as be used for price stability and inflation targeting.

However, the ON RRP rate will primarily be used for the implementation of the Target RRP rate. The ON RRP rate has a short-term orientation and serves as an operation target and part of the policy instruments toolkit of the BSP. The BSP said the ON RRP rate is a short-term interest rate and will be used as intervention by the BSP to mop up liquidity.

“The formal adoption of an operational target will provide market guidance and help strengthen the transmission mechanism of monetary policy,” BSP said.

The ON RRP facility has an overnight maturity and will be set daily. The auction time will be between 11:30am and 12nn; the bids will be submitted starting at 11:30am and auction results will be available at 12:10pm onward.

The auction size will be determined based on the BSP’s forecast of excess liquidity. There will be a daily announcement on the BSP’s Monetary Operations System (MOS) prior to each operation, at least an hour before auction. The BSP said the minimum bid amount is P10 million while the maximum number of bids is only one.

“The BSP will announce an offer size based on its forecasts of excess liquidity; Counterparties [banks] will submit bid rates and amount of tenders,” BSP said.

Image credits: Michael Edwards | Dreamstime.com