BSP hikes auction of term deposits

MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) is set to offer P20 billion more term deposits next month amid the continued strong demand from banks and trust companies.

Based on the schedule of term deposit auctions for the third quarter, the BSP is set to offer P50 billion worth of seven- and 28-day term deposits on July 6.

The amount is 66.7 percent higher than the P30 billion term deposits the BSP has been offering since the start of the weekly auction last June 8 as part of the shift to the interest rate corridor (IRC) system early this month.

Next month’s auction would consist of P10 billion worth of seven-day term deposits and P40 billion worth of 28-day term deposits or twice the current size of P20 billion.

BSP Governor Amando Tetangco Jr. said the change in the volume is consistent with the central bank’s earlier pronouncement that it would initially offer a small amount of term deposits that would be increased gradually based on the daily liquidity forecast.

“This is part of the refinement of the auction as we see the market becoming more familiar with the system,” Tetangco said.

The BSP chief pointed out the auction sizes would still be announced two weeks in advance of the scheduled auction.

 “So today’s announcement is consistent with that. This is also part of the discipline of the process. We will make further changes to the volume as necessary to help make the TDF more reflective of market conditions,” he added.

BSP Deputy Governor Diwa Guinigundo said the volume would be scaled up gradually to ensure smooth transition to the IRC regime,” he said.

Term deposits are common tools used by central banks for liquidity management. The facility allows central banks to withdraw the bulk of excess liquidity from the financial system and is suitable for shorter maturities due to their non-tradable nature.

Banks and trust companies continued to swarm the term deposit facility since the first weekly auction started last June 8.

During yesterday’s auction, tenders for the term deposits reached P164.95 billion or almost 5.5 times the issue size of P30 billion. Bids for the seven-day term deposits amounted to P69.63 billion while tenders for the 28-day term deposits reached P95.317 billion.

Both tenors fetched 2.5 percent.

“We continue to see ample liquidity in the system that indeed warrants an increase in the TDF volume to ensure monetary stability and sustained economic growth,” Guinigundo added.

Aside from the term deposit facility, the IRC system would also consist of the overnight lending facility and the overnight deposit facility. The interest rates for the standing liquidity facilities form the upper and lower bound of the corridor while the overnight reverse repurchase is set at the middle of the corridor.

The overnight lending facility replaced the repurchase window while the overnight deposit facility replaced the special deposit account (SDA) window.

On the other hand, the reverse repurchase facility was modified to a purely overnight reverse repurchase.

Increased activity and better pricing in money market rates, in turn, are seen to help add depth to money markets and help develop the domestic capital market.