The Bangko Sentral ng Pilipinas’ (BSP) has absorbed P1.8 trillion of liquidity from banks as of the end of the third quarter, 20 percent more than what was mopped up in the second quarter.
The BSP’s weekly auction of term deposit facility (TDF) is still its most effective tool to siphon off excess money supply in the financial system. Its overnight deposit facility (ODF) accounted for about 80.2 percent or P1.44 trillion of the total outstanding amount of liquidity drawn in by the central bank during the period.
The TDF was introduced in June of 2016 as part of the then newly implemented interest rate corridor (IRC) system whose adoption enabled the BSP to have a more effective monetary policy transmission.
The ODF is a BSP standing liquidity facility to provide or absorb liquidity. It mainly mops up residual system liquidity to prevent market interest rates from dropping below the IRC. The overnight lending facility is the ceiling rate for the overnight interbank rate.
About 17 percent or P306 billion of excess liquidity were placed in reverse repurchase agreement or RRP facility, one of the BSP’s open market operations (OMO).
OMOs include outright purchases and sales of securities, foreign exchange swaps and issuance of BSP securities which debuted on September 18 this year. This is why the issuance of 28-day BSP bills --- the lone tenor offered so far – only accounted for 2.8 percent of total absorbed liquidity by the BSP, or P50.4 billion.
The BSP securities facility withdraws structural liquidity from the financial system by “locking funds in longer-term monetary instruments” and it is also tradeable in the secondary market. The last time the BSP issued its own securities was in July 1993.
“The reinstatement of the BSP’s authority to issue its own bills and bonds provides an additional instrument to enhance further the implementation of monetary policy. It is a purely operational refinement under the IRC system and does not represent any change in the BSP’s current monetary policy stance,” said the BSP.
As of mid-October, the BSP has infused P1.9 trillion of liquidity in the pandemic-hit financial system, equivalent to 9.6 percent of GDP. In the first week of October, the BSP advanced a fresh P540 billion provisional loan to the National Government via a repo deal.
BSP’s liquidity-enhancing measures include reducing the benchmark overnight policy rate by 1.75 percent and cutting the reserve requirement ratio (RRR). The reduced RRR for banks and non-banks released about P250 billion of extra bank funds.
Despite that bank lending has yet to take off and in fact it slowed down in August, BSP Governor Benjamin E. Diokno said there is demand for loans and banks’ “appetite” to lend will improve.
The BSP, in terms of providing liquidity, an accommodative policy stance and assisting banks to cope with the health crisis, has “done a lot” but Diokno said the BSP’s “toolkit is far from exhausted (we) are prepared to do more, if and when necessary".
Big banks’ outstanding loans in August rose by 4.7 percent year-on-year, it was lower than July’s 6.7 percent lending growth. The BSP said the declining loan demand and risk aversion among banks slowed down bank lending.
In the meantime, the financial system’s money supply in August totaled P13.6 trillion, up 14.2 percent year-on-year but it was lower compared to the 14.7 percent growth in July.
The BSP said it is prepared to “deploy necessary measures to ensure adequate liquidity and credit” supportive of economic activity and recovery amid the pandemic.