YIELDS on the central bank’s term deposit facility (TDF) continued to drop amid rising demand, with banks parking some of their funds in the instruments after additional liquidity was infused into the system due to the reduction in the reserve requirement ratio (RRR) of big banks.

Total tenders for the Bangko Sentral ng Pilipinas’ (BSP) seven-day term deposits amounted to P119.288 billion on Wednesday, going beyond the P30 billion on offer as well as the P78.496 billion worth of bids seen last week.

Banks asked for yields ranging from 2.295% to 2.5%, lower than the 2.775% to 3% band logged on April 15. This caused the average rate for the one-week papers to settle at 2.4369%, shedding 52.09 basis points (bps) from the 2.9578% fetched a week ago.

The BSP has yet to resume auctions for the longer 14- and 28-day tenors.

The TDF is the central bank’s primary tool to gather excess liquidity in the financial system and to better guide market interest rates.

To support the banking system and financial stability, the central bank suspended the TDF auctions at the onset of the enhanced community quarantine in Luzon last month.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the lower yields sought by banks is a positive development and may mean that there is excess liquidity in the banking system during the lockdown.

He added that the lower yields also came weeks after the 200 bps reduction in the RRR of big lenders as well as “other tools by the BSP to infuse liquidity into the banking system.”

“Some of [these funds] found their way to the 7-day BSP TDF auction and able to earn relatively higher interest rate returns for excess funds,” Mr. Ricafort said.

The reserve requirement for universal and commercial banks has been lowered to 12% effective early April. Last week, the BSP said banks’ lending to small and medium-sized enterprises will also be counted as part of their compliance with reserve requirements.

BSP Governor Benjamin E. Diokno has been authorized by the Monetary Board to cut RRR by a total of 400 bps in 2020 in order to boost liquidity amid the pandemic.

Meanwhile, ING Bank N.V.-Manila Senior Economist Nicholas Antonio T. Mapa said there was “downward pressure on yields after BSP’s recent rate cut.”

The BSP slashed rates by another 50 bps last Thursday, barely a month since it reduced rates by the same amount, to encourage lending to the most vulnerable amid the crisis.

This brought borrowing costs to record lows, with the overnight reverse repurchase rate at 2.75%, while lending and deposit rates now stand at 3.25% and 2.25%, respectively.

The central bank has already cut rates by 125 bps this year following the 75 bps worth of reductions implemented in 2019. This means the BSP has already unwound the 175 bps in hikes done in 2018 when inflation was at multi-year highs. — L.W.T. Noble

RELATED ARTICLESMORE FROM AUTHOR