Banks losing interest in antiliquidity tool

For the first time in three months, financial institutions shied away from the central bank’s deposit facility meant to help contain the local inflation rate, possibly signaling banks are finding other outlets for their idle cash.

According to the Bangko Sentral ng Pilipinas (BSP), both the 14- and 28-day borrowing windows were undersubscribed, as banks submitted only P35.9 billion for the P40 billion on offer for the former and P19.9 billion for the P20 billion on offer for the latter.

This was the first time that banks’ tenders fell below the central bank’s offer amounts, although the banks have been growing increasingly disinterested in the longer-dated tenors of the BSP’s liquidity management tool in recent weeks, tendering progressively less and less amounts week after week.

“That shows that banks are simply not interested in the longer instruments,” said one bank treasurer, requesting anonymity. “But the interest in the seven-day term deposit facility is still very high. Banks only want their cash tied up for seven days.”

His view was validated by Wednesday’s auction results for the seven-day facility, which saw banks tender P72.2 billion in bids for the P50 billion on offer, resulting in a full award at an average yield of 3.1768 percent.

Banks may also be waiting for the results of Thursday’s interest rate setting meeting of the Monetary Board before committing their funds to longer-dated instruments, although most bankers now expect the central bank to keep its key overnight borrowing rate unchanged.

The BSP has been under pressure from the financial markets to tighten its monetary policy in response to the rising inflation rate which reached a three-year high of 3.9 percent last February.

But BSP Governor Nestor Espenilla Jr. said the central bank would not react to “water under the bridge”—referring to the rising prices over the last three months—and would instead keep a close watch on the inflation rate going forward into next year.

Espenilla said he expected prices of goods and services to stabilize by 2019 after the “transitory effects” of recent price hikes, including those caused by the Duterte administration’s tax hikes since January 2017, pass.

The central bank uses the term deposit facility to “sterilize” idle and inflationary cash, including some P90 billion that was released into the financial system after last month’s 1-percentage point reduction in banks’ statutory reserve requirements.