Term deposit yields mixed

MANILA, Philippines — Term deposits fetched mixed results anew following a suggestion from the International Monetary Fund (IMF) to pause on further reducing the level of deposits banks are required to keep with the Bangko Sentral ng Pilipinas (BSP).

The yield of the seven-day term deposits slipped to 3.7494 percent yesterday from last week’s 3.7586 percent, while the rate of the 14-day tenor also eased to 3.9084 percent from 3.9220 percent.

On the other hand, the 28-day term deposits fetched a higher rate of 3.9471 percent from 3.9416 percent.

IMF mission chief to the Philippines Luis Breuer said there is a need to pause on further reducing banks’ reserve requirements  to address communication challenges arising from the central bank decision to raise interest rates.

 “We did not see any significant monetary impact of those actions because the BSP offset these actions with other measures including increasing sterilization and absorption of liquidity using other tools. But we also noted that this has led to some communication challenges on the stance of monetary policy,” Breuer said.

The IMF official  said there is a need to maintain the current level until inflation  is on a downward path.

 “So in our view, we support BSP’s intention to take stock of what has been done already and pause perhaps on further reductions on the reserve requirement until inflation is clearly on a downward path and inflationary expectations are better anchored. Communications as they relate to inflation expectations are vey important because perceptions have an economic impact,” he said.

At yesterday’s auction, the  term deposit auction facility (TDF) was  oversubscribed as tenders for the P100 billion offering reached P124.5 billion.

Bids for the P40 billion seven-day term deposits reached P47.44 billion, while tenders for the P40 billion 14-day tenor amounted to P54.35 billion.

Likewise, bids for the 28-day tenor reached P22.71 billion versus the issue size of P20 billion.

The TDF was launched in June 2016 as part of the shift to the interest rate corridor (IRC) framework to guide short-term market rates toward the BSP policy interest rate.

It has been successful in absorbing the fresh funds that were released into the system with the reduction of the reserve requirement ratio (RRR) by 200 basis points.

The Monetary Board has already reduced the RRR twice this year to 18 percent from 20 percent, releasing around P190 billion in additional liquidity into the financial system to support the growing economy.

The first reduction that took effect on March 2 injected P90 billion worth of fresh funds into the system followed by another 100 basis point cut last June 1 that poured around P100 billion in additional liquidity into the economy.

The BSP has raised the reserve requirement ratio to 20 percent to prevent inflation from rising amid the build up of the country’s external payments position with the balance of payments (BOP) surpluses in the past few years.

Despite the reduction, the Philippines has the highest RRR in the region compared to China’s 17 percent, Brazil’s 15.5 percent, Indonesia’s 12 percent, Thailand’s six percent, Taiwan’s six percent, India’s four percent, Malaysia’s 3.5 percent, Singapore’s three percent, and Japan’s 0.8 percent.

“The Philippines has very high reserve requirement on bank deposits by international comparison. There is no question to us that reducing the reserve requirement is a good thing. The question is when to do it and by how much,” Breuer said.