Term deposit rates drop as demand remains high

MANILA, Philippines – Term deposits fetched lower rates amid higher demand with the improving liquidity in the financial system, the Bangko Sentral ng Pilipinas (BSP) reported yesterday.

The yield of the seven-day term deposits during yesterday’s auction eased to 3.0465 percent from last week’s 3.0772 percent as accepted yield ranged from three to 3.0995 percent

On the other hand, the 28-day term deposits fetched a lower rate of 3.3570 percent from last week’s 3.3778 percent as accepted rates ranged between 2.6 and 3.4875 percent.

BSP Deputy Governor Diwa Guinigundo said the term deposit rates are normalizing after testing the higher end of the interest rate corridor (IRC) last month.

Guinigundo said, the objective of the IRC framework is to bring market rates closer to the BSP’s policy rate of three percent.

“What you want is for both the seven and the 28 days to move closer to the policy rate. The policy rate is three percent and the market appears to be testing the higher side of the corridor,” he said.

The BSP auction committee previously rejected bids and made partial award for the 28-day term deposits to cap the rise in rates.

“Why should the TDF approximate the lending rate of the BSP,” he said.

The 28-day term deposits were undersubscribed during past auctions as banks decided to keep more cash in time for the Christmas season, the gradual phase out of the access of trust entities in the TDF as well as the foreign exchange operations of the BSP.

“Now banks have less need for cash after the holidays and the gradual phase out of the access of trust entities to BSP facilities continues. All of these will translate to higher liquidity out there and therefore there is that greater ability of the banks to place their deposits with the BSP,” Guinigundo said.

Guinigundo explained the developments are leading to increasing bid to cover ratio for both the seven and 28-day term deposits.

Bids for the seven-day term deposits amounted to P49.21 billion for the P30-billion issuance translating to a bid cover ratio of 1.64 percent. Tenders for the 28-day term deposits amounted to P172.05 billion for the P150 billion offering for a cover ratio of 1.15 percent.

“I think the liquidity is coming back,” Guinigundo said. Term deposits are used as a tool to mop up excess liquidity in the financial system.

Despite the strong demand, the BSP has decided to keep the TDF volume at P180 billion consisting of P150 billion worth of 28-day term deposits and P30 billion worth of term deposits. The volume has been raised six times since the facility was launched last June 8.