Banks swarm auction of P30-B term deposits

MANILA, Philippines – Banks swamped the maiden auction of term deposits as part of the shift to the interest rate corridor system with bids seven times the issue size, the Bangko Sentral ng Pilipinas (BSP) reported yesterday.

The BSP awarded in full the P10 billion seven-day term deposits and P20 billion 28-day term deposits.

The central bank said total tenders reached P199.71 billion or nearly seven times the P30 billion offering.

Last Friday, banks also swarmed the first auction of the overnight reverse repurchase with bids amounting to P574.07 billion. The BSP made a full award of P305 billion.

For term deposits, the BSP would initially offer a small amount of term deposits that would be increased gradually based on the daily liquidity forecast.

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.

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 would replace the repurchase window while the overnight deposit facility would replace the special deposit account (SDA) window.

On the other hand, the reverse repurchase facility would be 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.

The rate for the overnight lending facility was set at 3.5 percent instead of six percent, while that of the overnight reverse repurchase rate was set at three percent instead of four percent effective last Friday.

The rate for the overnight deposit facility was unchanged at 2.5 percent.

The BSP reiterated the shift to the IRC system does not represent a change in the BSP’s stance of monetary policy.