Philippines Joins India Seeking Better Policy Rate Transmission

  • Bangko Sentral to adopt interest rate corridor system 2Q 2016
  • Shift to corridor isn't a change in monetary policy stance

The Philippine central bank is pushing ahead with plans to improve the transmission of its policy moves, joining India in seeking to ensure monetary policy changes are better reflected by actual borrowing costs in the economy.

Bangko Sentral ng Pilipinas plans to adopt an interest rate corridor system by the second quarter of 2016, Governor Amando Tetangco said in a statement Wednesday after announcing the timeframe to bankers and fund managers late Tuesday. While the shift isn’t a change in the monetary policy stance, it will help improve the transmission of benchmark-rate adjustments to relevant money market rates, he said.

"The transition to the new interest rate framework is very timely in view of the current favorable inflation and output conditions," said Tetangco, who has kept the key interest rate unchanged all year. The new system will also help reduce the country’s reliance on the reserve requirement for sterilization operations, allowing the central bank to cut the requirement in the future "in line with regional norms," he said.

Improving the transmission of any monetary stimulus or policy adjustment is gaining importance as global growth falters and amid elevated market risks. In India, where the central bank made the biggest rate cut since 2009 Tuesday, Governor Raghuram Rajan is turning his attention to the country’s lenders who have been slow to pass on rate cuts earlier this year. Rajan said Tuesday he’ll focus on working with the government to eliminate any excuses banks give for keeping rates high.

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