Liquid banks swarm BSP, bid up deposit yields

Bangko Sentral ng Pilipinas. INQUIRER.net FILE PHOTO

Yields on the central bank’s short-term debt instruments spiked higher during the first auction after last week’s monetary policy tightening — an indication that financial institutions expect another rate hike in the future.

Amid the higher rates, banks’ demand for the term deposit facility rose to its higher level in recent weeks, with tenders totaling P129.7 billion for the only P80 billion on offer.

The Bangko Sentral ng Pilipinas made full awards on the 7-, 14-, and 28-day instruments, meant to help contain inflation by siphoning off idle cash circulating in the local financial system.

During Wednesday’s auction, 7-day facility drew P64 billion worth of tenders from banks, with the BSP making a full award of P40 billion at an average yield of 3.5123 percent. This marked a larger increase over the 3.4273 percent of the previous week compared to relatively narrower yield increments in previous weeks.

The spike in yields follows a statement made by BSP Governor Nestor Espenilla Jr. last week that regulators will maintain its current policy of allowing yields on the term deposit facility to rise, saying an upward adjustment in its inflation-fighting tool is a normal consequence of last week’s hike in the key policy rates.

The 14-day instrument was also oversubscribed with banks tendering P44 billion in bids for the P30 billion on offer. Regulators made a full award with the yield rising to 3.5855 percent from the previous week’s level of 3.4551 percent.

Finally, the yield on the 28-day instrument also rose to 3.4979 percent from the previous week’s 3.4732 percent. Banks tendered P21.7 billion worth of bids for the P10 billion on offer.

The central bank conducts auctions each week 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-P110 billion in idle cash which would otherwise be left to circulate unproductively in the local economy, potentially aggravating the inflation rate.

Espenilla earlier said the results of the weekly auction for short-term deposits will continue to be “market driven”, maintaining an earlier policy of allowing the 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.”/ac