The Bangko Sentral ng Pilipinas’ (BSP) monetary operations absorbed P2.1 trillion of liquidity as of the end of the third quarter of 2024, with the securities facility taking the bulk of financial system funds.
The P2.1 trillion was higher compared to the same period in 2023 of P1.8 trillion, and from June 2024, a similar P1.8 trillion amount.
The BSP essentially removes money from banks to park these excess money with the BSP to earn fixed interest rates. The main objective is to control and manage inflation that BSP is targeting will settle between two percent to four percent until 2028. As of end-November 2024, the country's inflation rate has averaged 3.2 percent.
Based on a report, about 42.4 percent or P890.4 billion of the total outstanding amount absorbed by the BSP was from its securities facility.
Placements in the overnight reverse repurchase (RRP) facility accounted for 37.2 percent or P781.2 billion; 11.1 percent or P233.1 billion in the term deposit facility (TDF); and 9.3 percent or P195.3 billion in the overnight deposit facility (ODF).
The TDF average weekly volume decreased to about P210.8 billion in the third quarter 2024 compared to P260 billion in the second quarter. The TDF auctions were generally fully subscribed, with average weekly bid-to-cover ratios of 1.0x for both the 7-day and 14-day tenors.
As for the weekly BSP securities’ auctions, the average weekly offer increased to P173.3 billion in the third quarter 2024 compared to P168.9 billion in the previous quarter. The average weekly bid-to-cover ratios for the 28-day and 56-day BSP bills in the third quarter were at 1.0x.
The RRP daily auctions also had firm demand during the quarter. The BSP noted that the RRP settled at 1.0x while the average daily total dropped to P414.3 billion in the third quarter versus P435 billion in the second quarter.
The BSP completed the phased implementation of the RRP reforms in September 2023 in line with the plan for an eventual shift to a variable-rate RRP auction format.
Phase 1 of the reform involved the change in the timing of the daily RRP operations to a morning schedule starting on May 29, 2023. Phase 2 was the shift from a fixed-volume to a full-allotment auction format for the RRP facility, which took effect on July 14, 2023. Phase 3 saw another shift from a fixed-rate to a variable-rate RRP auction format with a predetermined offer volume by Sept. 8, 2023.
The BSP restored its authority to sell its own bonds or securities after its charter was amended in 2019. Basically, the central bank auctions BSP bills to reduce money supply. It first introduced the securities facility in September 2020.
The TDF is also one of BSP’s main liquidity management tool. It was first launched in 2016 as part of the interest rate corridor system.
The BSP’s primary monetary policy instrument is the interest rate on its RRP facility. Through the RRP, the BSP borrows money from banks using government securities as collateral.
For 2024, the BSP’s Monetary Board has eased the target RRP rate by a combined 75 basis points (bps), and reduced the policy rate from 6.5 percent to 5.75 percent by Dec. 19.
To add to banks' liquidity, the BSP also cut the reserve requirement for big banks and other bank categories last October. The BSP cut the universal and commercial banks' RR ratio by 250 bps from 9.5 percent to seven percent. Non-banks, digital banks, thrift banks and rural banks' RR ratios were also lowered.
The BSP mops up excess liquidity to control inflation and improve its management.
The BSP recently announced that following the Dec. 2 meeting of the Development Budget Coordination Committee, it has decided to keep the two percent to four percent inflation target until 2028.
It said the inflation target remains appropriate as its medium-term goal for price stability, amid the current structure of the local economy and the macroeconomic outlook over the next few years.
The BSP noted that “prospects for aggregate demand and supply-side conditions point to a manageable inflation outlook despite upside risks” while inflation expectations “remain anchored to the current inflation target.”
“The outlook for domestic aggregate demand will be supported by easing monetary conditions, improving labor market dynamics, and continued implementation of investment-enhancing structural reforms. At the same time, the risk of possible domestic and external shocks will warrant continued close monitoring and proactive intervention measures from the whole of government,” said the BSP.