Overnight deposits in the Bangko Sentral ng Pilipinas significantly increased as of end-June, as banks took advantage of the higher interest rates offered by the virtually risk-free investment facility.
Placements in the overnight facility of the central bank amounted to P295.2 billion as of the end of June, up by 42.7 percent from P206.87 billion a year ago, the BSP said in a report.
The overnight borrowing rate—the interest rate paid for overnight deposits by banks—is one of the key tools used by the central bank to manage the amount of money circulating in the economy and to control inflation.
As of June this year, the BSP had already raised the borrowing rate twice. The first 25-basis-point hike was done in March, and the other 25-basis-point increase was implemented in May. These brought the overnight borrowing rate to 4.5 percent.
The hike was intended to temper growth of money circulating in the economy with the end goal of slowing down inflation. If banks put more funds in the BSP, there will be less money for lending to the public and, therefore, less money in circulation. Controlling the amount of available cash tempers the ability of individuals and enterprises to spend.
Prior to the rate hikes, the inflation rate was expected to exceed the 5-percent ceiling set for this year.