The Bangko Sentral ng Pilipinas (BSP) has absorbed P1.8 trillion of domestic liquidity in the first quarter this year, lower than what was siphoned off same period in 2022 of P1.9 trillion, based on the latest data.
The BSP removes money from banks to park excess liquidity with the BSP’s liquidity facilities such as the BSP bills or the securities facility and the term deposit facility (TDF) which are auctions held weekly.
As of end-March this year, the BSP bills accounted for 31.1 percent of absorbed liquidity or P559.80 billion of the total, while TDF had 19 percent or P342 billion.
The overnight reverse repurchase or RRP facility also mopped up 17 percent or P306 billion while the overnight deposit facility (ODF) accounted for 32.9 percent or P592.20 billion.
The BSP bills was introduced in September 2020 with a single tenor, the 28-day. With the recent reduction in both banks and non-banks’ reserve requirement ratios (RRR) which will release about P360 billion of excess money supply in the financial system, the BSP will offer a longer-dated securities tenor or the 56-day bills on June 30.
The excess liquidity after June 30 will come from an expiring Covid-related relief measure which authorized banks to use loans to micro, small and medium enterprises and large enterprises that are not affiliated with conglomerates as alternative compliance with the reserve requirement.
As the relief measure winds down, the BSP is improving its ability to control money supply through their open market facilities in particular through the issuance of central bank bills.
The additional BSP bills will expand the range of its term instruments under the interest rate corridor framework introduced in 2016.
The new tenor also increases the BSP’s flexibility to respond to changing liquidity conditions while providing additional guidance to short-term market interest rates, said the BSP.
Outgoing BSP Governor Felipe M. Medalla said earlier that while a 56-day BSP bills will compete with the Bureau of the Treasury’s treasury bills (T-bills), the central bank’s securities facility will have higher yields which will be attractive to banks and other participants in the auction. The 56-day BSP bills is too close to the 91-day T-bills.
But Medalla said that unlike the government which sells bonds for financing, the BSP bills are used for monetary management.
The BSP’s primary monetary policy instrument is the interest rate on its RRP facility. To achieve its intended inflation target of two percent to four percent, the BSP has several policy tools to make this happen, such as increasing or decreasing banks’ 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.