Tight liquidity due to lending, dollar demand leads to TDF offer cut

THE CENTRAL BANK decided to reduce offerings under the term deposit facility (TDF) amid robust lending and higher dollar demand, reflecting tighter liquidity in the market.
The BSP slashed the auction volume to P70 billion for Sept. 19, down from the P100 billion weekly amount set since June. Up for grabs are P40 billion worth of seven-day deposits, while the volumes for the 14-day and 28-day tenors were halved to P20 billion and P10 billion, respectively.
Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said there is a need to scale down TDF volumes given “tighter peso liquidity” due to the central bank’s foreign exchange (FX) operations.
The monetary authority conducts “tactical intervention” to smoothen any sharp swings in the daily peso-dollar trading. The peso breached the P54 level versus the greenback on Wednesday, its weakest showing since December 2005.
Separately, BSP Deputy Governor Diwa C. Guinigundo said that banks have been deploying cash for other purposes, which will leave smaller amounts which they can park under the central bank’s facility.
“We continue to see based on our liquidity monitoring and forecasting that banks have been able to make robust lending, higher FX purchases for corporate clients and investment resulting in more moderate placement in TDF facility,” Mr. Guinigundo said in a text message when sought for comment.
Tighter money supply conditions should actually bode well for the economy, he added.
“This is good because the economy is able to make fuller use of domestic liquidity to sustain economic activity,” Mr. Guinigundo added. “With less excess structural liquidity, the BSP would need to scale down its open market operation accordingly.”
Wednesday’s auction was undersubscribed for the second straight week, as banks only wanted to place P93.128 billion versus the P100 billion which the central bank wanted to sell.
Only the two-week tenor snatched substantial demand ahead of an expected rate hike during the BSP’s Sept. 27 policy meeting. However, yields fetched for these instruments climbed across all tenors, mirroring market expectations of rising interest rates.
The TDF is currently the BSP’s main tool to arrest excess money supply in the financial system. The weekly auctions of short-term papers are meant to usher market and interbank rates within the 3.5-4.5% range.
Another rate hike is on the table for the Monetary Board’s upcoming review, with several economists even flagging an increase of another 50 basis points as inflation spiked to a fresh nine-year high of 6.4% in August. This brought the eight-month average to 4.8%, well above the 2-4% target band.
The BSP has raised rates by a total of 100bps this year in a bid to douse inflation expectations. — Melissa Luz T. Lopez