The Bangko Sentral ng Pilipinas (BSP) mopped up P1.72 trillion of excess liquidity from the financial system as of end-January 2024 with the BSP bills siphoning off most of the domestic money supply.
The BSP absorbs excess liquidity to control inflation and for active liquidity management. Basically, it removes money from banks to park these funds in the BSP’s interest-earning monetary operations and to influence the underlying demand and supply conditions for central bank money.
During the period, the BSP securities facility absorbed about 45.27 percent of the total or P778.27 billion.
Meanwhile, placements in the term deposit facility (TDF) totaled P398.35 billion or about 23.17 percent of total.
The daily instruments such as the overnight reverse repurchase facility absorbed 21.23 percent or P365 billion while the overnight deposit facility accounted for 10.32 percent or P177.41 billion of the total placements.
The BSP noted that the auction results for the BSP securities and TDF “reflected how eligible counterparties managed their asset and liquidity positions as they tended to client requirements during the holiday season.”
The BSP introduced the TDF in mid-2016 after adopting the interest rate corridor system. It launched the BSP bills in September 2020 after it restored its authority to sell its own bonds or securities after its charter was amended in 2019. The central bank auctions BSP bills to reduce money supply.
BSP Deputy Governor Francisco G. Dakila Jr. said BSP’s new enhancements of its policy instruments should help improve the pass-through effect of benchmark rates and its open market operations (OMO).
In December last year, the BSP announced more enhancements to its OMO for a more effective monetary policy transmission.
This involved more review of the various features of its monetary tools to improve monetary policy transmission as well as foster the development of the money market through better price discovery, it said.
This follows its most recent amendments to its BSP securities facility which as of Nov. 30, 2023 is accessible to trust entities. Previously, trust entities which are banks’ trust departments and stand-alone trust firms, are only permitted to transact BSP bills in the secondary market.
Under a new circular, trust entities can participate in the securities facility primary market via its unit investment trust funds (UITFs). Trust entities will now join the banks in the auction of BSP bills every Friday.
According to the BSP, “expanding the eligible participants in the primary market of BSP securities enhances the BSP’s capability to manage liquidity in the system in order to guide short-term interest rates toward the policy rate.”
It added that “this will ensure the tradability and viability of BSP Securities as a highly liquid instrument, thus allowing for better price discovery and monetary policy transmission.”
The difference between a primary market and a secondary market is that the former is where the securities are first issues while the latter is where securities are traded by investors.