Banks dodge BSP liquidity trap
Banks shied away from the Bangko Sentral ng Pilipinas’ weekly operation to mop up excess liquidity from the local financial system—a symptom, BSP Governor Amando Tetangco Jr. believes, of the growing need for cash by banks’ clients ahead of the holiday spending season.
Thursday, banks submitted only P15.8 billion worth of bids for the six-day term deposit facility, which paid depositors an average yield of 2.6059 percent, out of the P30 billion the central bank made available.
The 27-day facility, meanwhile, saw P113.2 billion worth of bids for the P150 billion BSP offered and the average accepted yield was pegged at 2.9557 percent.
The term deposit is a key liquidity absorption facility commonly used by central banks to manage liquidity. Due to the BSP’s inability to issue its own debt instruments, this facility is used to withdraw a large part of the structural liquidity from the financial system to bring market rates closer to the BSP’s own policy rate.
In effect, the facility offers banks incentives through higher interest rates to park their funds with the BSP temporarily, instead of pushing them out through cheaper loans to clients who may no longer have productive uses for more cash.
“There was under-subscription at the auction,” Tetangco said in a text message to reporters. “Possible reasons include seasonality (banks holding on to cash for the holidays) and the withdrawal of trust accounts from BSP facilities.”
Tetangco said these factors were the reason behind the decline of the so-called “bid to cover” ratio—the amount that banks tender as a ratio of what the BSP offers—to 0.5288 and 0.7548 for the six-day and 27-day tenor, respectively.
Nonetheless, the BSP chief allayed worries that the inability of the term deposit facility to immobilize more liquidity from the extremely cash-rich Philippine financial system would lead to higher consumer prices down the road.
“We see the level of liquidity in the system as still healthy and non-inflationary,” Tetangco said. “We nevertheless remain watchful of external developments that may affect domestic liquidity through shifts in capital flow direction and magnitude.”
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