BSP allowing banks to push up short-term rates

Monetary regulators will maintain their current policy of allowing yields on their term deposit facility to rise, saying an upward adjustment in their inflation fighting tool is a normal consequence of last week’s hike in the key policy rates.

According to Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr., the results of the weekly auction for short-term deposits will continue to be “market driven,” maintaining an earlier policy to allow yields on the 7-, 14- and 28-day instruments to rise in anticipation of monetary policy tightening.

“That’s the natural progression,” he said. “It’s not a question of we want rates to rise or not. It’s the consequence of what we’re trying to do. And it’s going to be market-driven.”

“For monetary policy to work, what the BSP has control over is the very short-term rates,” Espenilla said, explaining that these, in turn, affect the rest of the rates along the financial system’s so-called “yield curve”—a graphical representation of progressively higher interest rates for the entire spectrum of benchmark debt securities, from the shortest to the longest tenors.

The central bank conducts auctions weekly for short-term securities, soliciting tenders from financial institutions seeking to deposit their excess cash in exchange for interest fees. The weekly auctions “sterilize” anywhere between P60 billion and P110 billion in idle cash that would otherwise be left to circulate unproductively in the local economy, potentially aggravating the inflation rate.

At present, the BSP’s 7-day term deposit facility has a yield of 3.4273 percent, the 14-day instrument at 3.4551 percent and the 28-day facility at 3.4732 percent—all three tenors exhibiting a general uptrend since mid-February, as the central bank accepted higher bids from banks.

Last week, Espenilla raised the possibility of another interest rate hike this year on the heels of the Monetary Board’s decision to raise its key overnight borrowing rate by 25 basis points.

“Looking ahead, the BSP stands ready to undertake further policy action as necessary to ensure the achievement of its price and financial stability objectives,” he said, after conceding that prices of goods and services might continue to rise beyond expectations for the rest of 2018 and going into next year.

Some bankers believe the BSP may have to raise its overnight rates—on which financial institutions base the interest rates for their consumer and corporate loans—by another 25 basis points this year to account for the higher-than-expected inflation.