Market starts to feel impact of IRC system

MANILA, Philippines – The yield of the longer-dated term deposits is starting to inch up amid efforts by monetary authorities to bring market rates closer to the policy rates with the launch of the interest rate corridor (IRC) system by the Bangko Sentral ng Pilipinas (BSP) three months ago.

BSP Deputy Governor Diwa Guinigundo said market rates are slowly moving toward the policy rate after the 28-day term deposits fetched higher yield during yesterday’s term deposit facility (TDF) auction.

Bids for the seven-day term deposits reached P48.03 billion while tenders for the 28-day term deposits amounted to P151.88 billion.

The BSP made a full award of P10 billion for the seven-day term deposits and P60 billion for the 28-day term deposits.

The seven-day term deposits fetched 2.5 percent. On the other hand, the longer 28-day term deposits fetched 2.501 percent as accepted yield ranged between 2.5 and 2.525 percent.

“Interest rates are now beginning to inch up given the liquidity dynamics among the banks both in the interbank and with the BSP. We should see as a result of the IRC implementation market rates slowly moving toward the policy rate, signaling a more effective monetary policy,” Guinigundo said.

Likewise, Guinigundo reported the oversubscription for the 28-day term deposits as the bid to coverage ratio continued to 2.53 yesterday from 2.87 last week. During the first auction last June 8, the bid to coverage ratio for the longer dated term deposits stood at 5.86.

“We are seeing the initial signs that the open market operations of the BSP under the IRC are beginning to bite. This means oversubscription is declining and more funds are being mopped up by the BSP increasingly through the term deposit facility,” he said.

The BSP has raised the volume of the TDF thrice since the first auction was held last June 8 with an original volume of P30 billion. It was increased to P50 billion in July to P70 billion in August, and to P90 billion starting Aug. 31.

Term deposits are common tools used by central banks for liquidity management. It allows central banks to withdraw the bulk of excess liquidity from the financial system.

Robust domestic demand and the benign inflation environment prompted the BSP to keep policy rates steady since September 2014. Last June 3, the BSP implemented an operational adjustment reducing the overnight lending rate to 3.5 percent from six percent as well as the overnight reverse repurchase rate to three percent from four percent.