BSP absorbs P2.05-T liquidity to control inflation

Published February 21, 2022, 9:40 AM

by Lee C. Chipongian

The Bangko Sentral ng Pilipinas (BSP) has siphoned off P2.049 trillion of excess liquidity as of end-January as part of its inflation control and management.

The central bank removes liquidity from banks to park these excess money supply with the BSP’s monetary operations such as the term deposit facility (TDF) to earn fixed interest rates.

Based on the BSP’s latest Monetary Policy Report (MPR), as of end-January, about 41 percent or P840.1 billion were absorbed by the TDF.

Another 24.6 percent or P504.1 billion were placements in the overnight deposit facility (ODF) and 19.5 percent or P399.9 billion were in the BSP securities facility.

The rest or 14.9 percent amounting to P305 billion were absorbed by the BSP’s overnight reverse repurchase (RRP) facility.

So far, for the month of February, the average weekly bid-to-cover ratios for the 7-day TDF has dropped to 1.026 from 1.302 in January, while for the 14-day it likewise slipped to 1.197 from 1.575 in the previous month.

“The TDF auction results during the review period show continued normalization in the financial system following the December 2021 holidays amid ample liquidity. Moreover, short-term market interest rates remain low,” noted the BSP.

As for the daily RRP auctions, the average bid-to-cover ratio in February stood at 3.719, lower than the bid-to-cover ratio in January of 4.123, added the BSP.

The BSP’s primary monetary policy instrument is the interest rate on its RRP facility which has remained at a low two percent since November 2020. Through the RRP, the BSP borrows money from banks using government securities as collateral. The borrowing rate is called the RRP rate.

To achieve the BSP’s intended inflation target of two-four percent for 2022, 2023 and 2024, it has several policy tools to make this happen, such as increasing or decreasing banks’ reserve requirement ratios (RRR) and its weekly auctions for the TDF and BSP bills.

Other options include adjusting the rediscount rate on loans extended to banking institutions on a short-term basis against eligible collateral of banks’ borrowers, and the outright sales and purchases of the BSP’s holdings of government securities.

The main objective of these monetary operations is to control and manage inflation which the BSP forecasts will average at 3.7 percent for this year and 3.3 percent for 2023, both within the two-four percent target. As of January, the inflation rate is at three percent.

The BSP expects inflation will decelerate in the first months of 2022 but has the potential to accelerate towards the upper end of the two-four target in the second quarter before moving back to within the target range, according to the MPR. By the third quarter this year, inflation is expected to keep within the target and is seen to stay controlled until end-2022.

As pandemic response, the BSP has injected P2.3 trillion of financial system liquidity since the COVID-19 crisis began in March 2020.

Part of BSP anti-pandemic measures is to reduce the interest rates by 200 basis points and to cut the RRR to 12 percent from 14 percent to shore up market confidence and to make sure there are adequate liquidity and credit while battling the public health crisis.