Banks shun BSP’s inflation control facility amid tight liquidity

The central bank reduced the volume of the weekly term deposit facility (TDF) auction, but financial institutions remained cautious toward parking their funds in the instruments meant to siphon off inflationary idle funds from the economy.

At the same time, banks shied away from the longer-term tenors offered by the Bangko Sentral ng Pilipinas (BSP) in anticipation of a possible interest rate hike next week during the policy setting meeting of the Monetary Board.

“Liquidity is tight and funding is expensive, therefore there’s no interest to participate in the TDF market,” said one bank treasurer requesting anonymity. He explained banks also tended to pay off expensive deposits from their maturing placements with the central bank, hence the recent lukewarm interest in the facility.

During Wednesday’s term deposit facility auction, financial institutions pushed interest rates marginally higher on the seven- and 14-day instruments, but the yield on the 28-day facility declined slightly on weak demand.

The total volume for the entire TDF auction was reduced by the central bank to P70 billion this week from P100 billion last week in anticipation of the diminished interest from banks.

The yield on the seven-day term deposit facility rose to 4.3884 percent from the previous week’s 4.3744 percent. Banks tendered P60.3 billion worth of bids for the P40 billion on offer, with the central bank making a full award of P40 billion.

Meanwhile, the central bank’s 14-day term deposit instrument also saw a hike in its yield to 4.4339 percent from the previous week’s 4.4224 percent. Banks submitted only 17.4 billion in bids for the P20 billion offered, with authorities making an award of 17.1 billion.

Finally, the yield on the 28-day term deposit facility dipped slightly to 4.4754 percent from the previous week’s 4.4824 percent. Banks tendered only 9.4 billion worth of bids for the P10 billion on auction, with the central bank accepting P9.2 billion worth.

All told, financial institutions submitted P87.1 billion in bids for the P70 billion that the central bank attempts to “sterilize” from the financial system each week in a bid to cap the inflation rate. Of this amount, P66.3 billion were accepted.

Espenilla told reporters last week authorities would carefully weigh the need for another rate hike after poring over the latest inflation data.

The Monetary Board will convene on Sept. 27 to decide on the response to the August inflation rate of 6.4 percent, which is a nine-year high. Market watchers expect another rate hike but are divided whether this will come in the form of a 25- or 50-basis point adjustment.