By Lee C. Chipongian
The Bangko Sentral ng Pilipinas (BSP) sliced off another P10 billion from the weekly auction of its term deposit facility (TDF) as banks lend more to borrowers or purchase US dollar for their clients.
The TDF volume is further reduced to P60 billion on September 26, from P70 billion last Wednesday’s auction. The BSP cut the TDF volume from P100 billion – which it has been since June 6 – to P70 billion last week.
BSP Deputy Governor Diwa C. Guinigundo said further improvements or refinements to its open market operations (OMO) including the auction-based OMO are being reviewed regularly. The TDF volume is reviewed every week.
“We decided to reduce the volume offering because our liquidity forecasts indicate lower excess liquidity in the system,” Guinigundo said yesterday.
“More funds are going into loans, investments and dollar purchases. This is auspicious because the banks are doing a good job in financial intermediation especially in the face of government infra projects aimed at addressing our large infra gap and enhance our productive capacity,” he further said adding that “OMO is precisely aimed at finetuning the level of domestic liquidity.”
Only the 14-day TDF volume is reduced, from P20 billion to P10 billion. The other tenors will still be offered at P40 billion for the 7-days and P10 billion for the 28-days.
The TDF is a BSP tool intended for liquidity management. After two years, it has allowed the central bank to reduce banks’ reserve requirement ratio (RRR) this year. Slashing the reserves ratio will enable banks to have more funds or liquidity which the BSP said will support economic activity and the capital market development.
The TDF also encourages the establishment of benchmarks for short-term interest rates.
Last Wednesday, the TDF yields continued to increase, except for the 28-days which had a lower rate this week after five weeks of moving up.
In all, the TDF auction attracted tenders amounting to P87.25 billion versus offer of P70 billion, with the 7-days as the only oversubscribed offering.
The TDF market is anticipating another policy rate hike next week of 25 to 50 basis points to address high inflation which reached 6.4 percent in August, and to provide relief to the peso-US dollar exchange rate which saw the peso falling to a 13-year of low of P54.
The Monetary Board of the BSP has raised policy rates by 100 basis points so far this year.
On Wednesday’s TDF auction, the 7-days had tenders of P60.32 billion with rates increasing to 4.3884 percent week-on-week. Both the 14-days and 28-days have lower offers this week of P20 billion and P10 billion compared to the previous P40 billion and P20 billion, respectively.
The 14-days had tenders of P17.44 billion with a rate of 4.4339 percent while the 28-days attracted P9.48 billion and a lower yield of 4.4754 percent.
When the BSP reduced RRR from 20 to 18 percent this year, it released P180 billion-P190 billion into the financial system, which was then absorbed by the TDF.
BSP Governor Nestor A. Espenilla Jr. has said that the RRR cuts do not lead to prolonged excess liquidity because of its OMO and foreign exchange operations. These RRR reductions will free up funds that banks will no longer be required to reserve with the central bank. The two reductions in February and May have been applied to the reservable liabilities of all banks and non-bank financial institutions with quasi-banking functions.
The BSP’s RRR on bank deposits is one of the highest by international standards. It was a necessity in the past given the BSP’s limitations in issuing its own instruments to control liquidity and ultimately inflation, at the time when there were large balance surpluses. Thus, RRR were increased to prevent inflation from shooting up.