Banks bet on Thursday rate hike as they shy away from BSP deposit window

Financial institutions shied away from the central bank’s short term borrowing window on Wednesday with many betting they get better returns on their funds after Thursday’s Monetary Board meeting where a rate hike is expected.

Because of this, the weekly term deposit facility (TDF) auction of the Bangko Sentral ng Pilipinas was undersubscribed for the second week in a row.

“Everyone is betting on a rate hike [on Thursday] so there’s no rush to use the TDF for the longer dated tenors,” a bank treasurer said.

During Wednesday’s auction, financial institutions pushed interest rates higher on the seven-, 14- and 28-day instruments despite weak demand for the last two tenors.

The total volume for the entire TDF auction was reduced further by the central bank to P60 billion this week from P70 billion last week in anticipation of the diminished interest from banks.

The yield on the seven-day term deposit facility rose to 4.4215 percent from the previous week’s 4.3884 percent. Banks tendered P51.6 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 4.4722 percent from the previous week’s 4.4339 percent. Banks submitted only P9.6 billion in bids for the P10 billion offered, with authorities making a partial award of P8.7 billion.

Finally, the yield on the 28-day term deposit facility rose slightly to 4.4877 percent from the previous week’s 4.4754 percent. Banks tendered only P4.5 billion worth of bids for the P10 billion on auction, with the central bank accepting the entire P4.5 billion.

All told, financial institutions submitted P65.7 billion in bids for the P60 billion that the central bank attempted to “sterilize” from the financial system this week in a bid to cap the inflation rate. Of this amount, P53.1 billion was accepted.

Central bank officials earlier vowed to carefully weigh the need for another rate hike after poring over the latest inflation data.

The Monetary Board will convene on September 27 to decide on the response to the August inflation rate of 6.4 percent, which is a nine-year high. Most market watchers expect a 50-basis point upward adjustment.  /kga