Philippines reviewing new liquidity management tool

The Philippines is eyeing a tool is that provides deposit and lending facilities and ensure sufficient money supply.

The Bangko Sentral ng Pilipinas is introducing more changes to a  liquidity management tool, called the special deposit account (SDA), which basically is a facility that allows the BSP to accept deposits from banks.

BSP Governor Amando M. Tetangco Jr. said the interest rate corridor, will need to be put in placed as they gradually introduce more revisions to SDA, of whose pricing is being rationalized to reduce the costs to the BSP.

“The interest rate corridor system, among other benefits, would provide guidance for short-term interest rates and promote the development of the interbank capital market,” Tetangco explained.

“As the corridor is adjusted, banks would be discouraged from parking their funds with the central bank and prevent the central bank from crowding out the private sector.”

“(An) Interest rate corridor allows a central bank to offer banks standing facilities for both lending and deposit,” explained BSP Deputy Governor Diwa C. Guinigundo.

Guinigundo said that lending to the banks ensures market liquidity and that deposit facilities provide the banks with an “outlet for their surplus funds” and at the same time “offers the central bank additional facility to mop up these excess funds.”

The BSP has already sought the assistance of the International Monetary Fund to further study the proposed liquidity facility.

The Philippine government has been trying to find ways to lure these funds from SDAs and diverted into economic-enhancing projects such as infrastructure development as well as more lending funds for productive activities.

For more.