By Melissa Luz T. Lopez, Senior Reporter
DEMAND for term deposits shifted towards shorter tenors yesterday, driving yields slightly lower ahead of monetary policy decisions in the United States and in the Philippines.
Banks wanted to place P120.679 billion in term deposits this week, lower than the P124.499 billion in bids received a week ago.
Still, the amount settled above the P100 billion which the Bangko Sentral ng Pilipinas (BSP) wanted to auction off.
Nearly half of the tenders went into the week-long papers, marking a shift in preference ahead of the release of key economic data and central bank decisions due early August.
Offers for the seven-day deposits surged to P51.935 billion on Wednesday, rising from last week’s P47.436 billion to surpass the central bank’s P40-billion offering. This pushed the average yield to 3.7405% compared to 3.7494% fetched during the July 25 exercise.
On the other hand, bids for the 14-day tenor slipped to P49.801 billion from the P54.352 billion received a week ago. Still, demand was overwhelming as banks wanted to park more funds beyond the P40-billion auction amount.
This brought margins lower to average 3.9016% this week versus a 3.9084% rate seen previously. Banks wanted returns within the 3.8-3.925% range, well below the four percent ceiling.
In contrast, banks veered away from the 28-day deposits and betted only P18.943 billion, down from P22.711 billion a week ago and below the P20 billion which the BSP wanted to sell. This gave them scope to demand for bigger returns, with the average yield rising to 3.9605% from 3.9471% a week ago.
The term deposit facility (TDF) is currently the central bank’s main tool to capture excess money supply in the financial system. The BSP holds the weekly auctions to bring market and interbank rates within its desired spread, which currently ranges from 3-4%.
The BSP has been offering P100 billion for its weekly TDF auctions since June.
The US Federal Reserve is broadly expected to keep interest rates steady this week, while the BSP is seen to announce another rate hike during their Aug. 9 meeting. BSP Governor Nestor A. Espenilla, Jr. has said the central bank is eyeing a “strong follow-through” to successive rate hikes in May and June in an attempt to rein in inflation expectations.
The central bank is studying further “refinements” to the TDF auctions, which include the chance to reallocate volume offerings across tenors, conduct the auctions more than once a week, and shorten the lead time in announcing offer volumes.
“The continuous efforts of the BSP to refine its monetary operations are meant to enhance its capacity to guide short-term market interest rates to move closely with the BSP policy rate, and in the process, strengthen the transmission of changes in the monetary policy stance to the rest of the economy,” the BSP said in its quarterly report on inflation published last month.
The International Monetary Fund earlier said that the central bank’s use of the TDF has proven to be successful in shoring up excess liquidity following the reduction in the reserve requirement ratio (RRR) imposed on big banks.
The BSP has trimmed the reserve standard to 18% as of June, in keeping with Mr. Espenilla’s goal to bring the level to single-digit over the next six years and make it at par with neighboring economies. However, he said last week that the central bank will resume the “gradual” cuts next year as the regulator waits for inflation to return to the 2-4% target range.
Some market observers have quipped that the reserve cuts appeared to be sending mixed signals, as it the two cuts were followed by two rate hikes from the BSP. However, policy makers have said that the RRR adjustments are procedural and should not be taken as a change in policy stance.

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