Term deposit rates rise further

MANILA, Philippines — Term deposits continued to fetch higher rates as banks awash with cash swarmed yesterday’s auction anew.

The seven-day term deposits fetched a higher rate of 3.1893 percent yesterday from last week’s 3.1767 percent, while the 14-day tenor fetched a higher rate of 3.2404 percent from 3.1674 percent.

Likewise, the rate for the 28-day term deposits rose to 3.3274 percent from 3.2627 percent.

Bids amounted to P145.82 billion. All tenors were oversubscribed.

The decision of the BSP’s Monetary Board to reduce the reserve requirement ratio (RRR) to 19 percent from the previous 20 percent starting March 2 released about P90 billion worth of additional liquidity into the financial system.

Tenders for the seven-day term deposits amounted to P70.84 billion, higher than the P50-billion offer size.

 Bids for the 14-day term deposits reached P52.25 billion versus the P40 billion volume while tenders for the 28 days amounted to P22.73 billion compared to the P20 billion offer size.

The term deposit facility is a key liquidity absorption facility used by central banks for liquidity management. It is tasked to withdraw a large part of the structural liquidity from the financial system as part of the shift to the interest rate corridor (IRC) framework in June 2016 to bring market rates closer to the BSP policy rate.

Dennis Lapid, deputy director of the BSP’s Department of Economic Research, said the BSP could now effectively manage liquidity in a more market-friendly manner with the shift to the IRC.

 He said the BSP would pursue the gradual reduction of the RRR as this is largely a function of the liquidity absorbing ability of the central bank’s open market operations.

“There’s also a practical reason for doing it with a gradualist approach. If you do a one-time large adjustment, we’re not sure how the counterparties will respond. It might be a case of these financial institutions trying to take a drink from a fire hose if you go to single digits in one big drop,” he said.

He warned about the risk wherein banks “might not necessarily know how to deploy the liquidity.”

BSP Governor Nestor Espenilla Jr. earlier said the yields of the term deposits continued to trace a pattern consistent with healthy price discovery in line with macro fundamentals.