Yields on BSP’s term deposits increase as BSP pauses monetary easing

YIELDS ON term deposits ended mostly higher as the central bank decided to pause its monetary easing cycle, with liquidity from previous reserve requirement ratio (RRR) reductions yet to find its way into the financial system.

Tenders for the Bangko Sentral ng Pilipinas’ (BSP) term deposit facility (TDF) amounted to P171.972 billion, surpassing the P150 billion on the auction block, central bank data showed.

This is also higher than the P160.179 billion in bids the BSP received on Nov. 13 for the P160 billion on offer.

Banks’ bids for the seven-day term deposits hit P63.72 billion, going beyond the P50 billion on offer and also beating last week’s P48.058 billion worth of bids for the P60 billion on the auction block.

Accepted yields for the tenor clocked in from 4.15% to 4.3456%, a slimmer range compared to last week’s 4.15-4.45%. This resulted in an average rate of 4.2374%, inching up by 1.1 basis point (bp) from last week’s 4.2264%.

Meanwhile, the 14-day papers attracted bids worth P47.465 billion, failing to fill the P50 billion on offer and also lower than the P57.8 billion in tenders seen last week.

Lenders asked for returns ranging from 4.25% to 4.5%, a slightly wider range versus the 4.2-4.425% band seen a week earlier. The average rate for the two-week papers inched up to 4.3533%, 3.49 bps higher than last week’s 4.3184%.

On the other hand, the 28-day deposits attracted tenders totalling P60.787 billion, well beyond the central bank’s P50-billion offer and also beating the P54.321 billion in bids seen last week.

Rates for the one-month tenor ranged from 4.29% to 4.45%, thinning from the previous auction’s margin of 4.25-4.473%. This brought the one-month paper’s average rate to 4.3592%, 0.05 bp down compared to last week’s 4.3597%.

The TDF is the BSP’s main tool to shore up excess liquidity in the financial system and to better guide market interest rates.

The bids seen at this week’s auction could mean that liquidity released after the recent reserve requirement ratio cut has yet to flood the financial system, according to ING Bank N.V.-Manila Senior Economist Nicholas Antonio T. Mapa.

“Interesting to see that bids were higher this week compared to last week indicating that the recently freed up funds from recent RRR reductions have yet to find a destination aside from BSP facilities,” he said in an email to BusinessWorld.

“For the time being, banks have more liquidity to deploy and we can expect that 7-day and 28-day placements were prioritized given the timing of this auction, being on the 3rd week of the month,” he added.

Meanwhile, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the higher yields came after the BSP’s decision to hold policy rates.

“Most BSP TDF auction yields were again mostly higher for this week…after the BSP kept its key policy rates unchanged on Nov. 14 despite the 0.25-bp [US] Fed[eral Reserve] rate cut on Oct. 30, weaker peso exchange rate and expectations that inflation already bottomed out in October 2019…as this could fundamentally likewise lead to some slight upward adjustments in local interest rates,” Mr. Ricafort said in a text message.

The reserve ratio of universal and commercial banks now stands at 15% following the effectivity of the 100-bp cut in RRR announced in September. Likewise, the RRR of thrift banks is now at five percent, while that for rural banks stands at three percent.

The BSP announced last month that the reserve ratio of universal, commercial and thrift banks will be slashed by another 100 bps effective December, bringing total reductions to their reserve ratios for this year to 400 bps. This cut will also apply to the reserve ratio of non-bank financial institutions with quasi-banking functions (NBQBs).

This will bring the reserve ratio of universal and commercial lenders to 14% by December, while the RRR of thrift banks will stand at four percent. On the other hand, the reserve ratio of NBQBs will be cut to 14% next month.

Meanwhile, the BSP’s Monetary Board, at its policy meeting last week, kept its benchmark interest rates for the overnight reverse repurchase, overnight deposit and lending facilities at four percent, 3.5% and 4.5%, respectively.

The move was widely expected after BSP Governor Benjamin E. Diokno hinted in separate television interviews that the central bank is “likely done” with rate cuts for the year.

The BSP has cut rates by a total of 75 bps this year, partially dialling back the 175-bp hike it fired off last year in the face of multi-year high inflation. — L.W.T. Noble