Debt securities

BSP plans better liquidity control with debt securities held by more banks

MANILA, Philippines — The central bank can expand the existing set of eligible market players who have access to its bills and bonds, a system which, depending on the needs, could make the instrument more effective in controlling inflation or promoting Economic Growth.

“We continue to study the characteristics of BSP securities to improve their favorable market characteristics and make them comparable to other assets available in the market,” Bangko Sentral ng Pilipinas Governor Benjamin Diokno said during a briefing in line.

“Consultations are underway to gather more information on market views and preferences,” he said.

“This is consistent with the objective of providing better guidance to short-term market interest rates under the Interest Rate Corridor (IRC) in order to improve the transmission of BSP monetary policy”, he added.

The duration or maturity period, volume and frequency of issuance of BSP securities will continue to be guided by the agency’s assessment of market developments and liquidity conditions and discussions with central bank counterparties.

BSP securities are considered to be the central bank’s main instrument in managing financial liquidity of a structural nature. When the central bank wants to keep inflation under control, it can reduce the amount of liquidity flowing in the local financial system by selling more debt securities to banks. Conversely, when it wants to promote economic growth in times of low inflation, the central bank can buy back these debt securities, thus freeing up more liquidity to financial institutions in the process.

Since its launch in September 2020, market interest in BSP invoices has remained strong, characterized by constant oversubscriptions during their weekly auctions.

According to Diokno, the addition of securities as a monetary operating tool under the IRC “has provided the BSP with greater flexibility in managing the liquidity of the financial system”.

The addition of BSP securities to “standard monetary operations,” the central bank said last year, “provides an additional instrument for managing liquidity in the financial system.” It also supports the “implementation of monetary policy” under the IRC.

The agency reiterated that the issuance of debt securities does not represent a change in the direction of monetary policy.

The power of the BSP to issue its own debt securities under its instruments for regular monetary operations was restored by Republic Law No. 11211, which amended the new Central Bank Law of 1993.

Previously, the BSP was only allowed to issue its own debt instruments in the event of extraordinary movements in price levels. The re-establishment of the power of the BSP to issue its own debt securities provided it with an additional monetary instrument to absorb liquidity from the financial system.


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