Market has improved liquidity absorption – Guinigundo

The central bank’s term deposit facility (TDF) signals the market’s strong capacity to draw in liquidity and funnel these into loans and investments, a ranking Bangko Sentral ng Pilipinas (BSP) official said.

BSP Deputy Governor Diwa C. Guinigundo said TDF under subscriptions means the market has a “greater absorption of peso liquidity” which was one of the reasons for implementing the interest rate corridor (IRC) system in the first place. The IRC was a significant BSP operational reforms adopted in June of last year.

Guinigundo said the IRC system “has provided the BSP the means to drain liquidity gradually” on a long-term period. This would enhance the transmission of monetary policy to market interest rates over the medium term, he added.

He said the market’s reaction and reception to the IRC is positive and that participants “have adjusted relatively quickly” to the new framework for the monetary operations of the BSP.

This week’s TDF auction has a reduced volume of R150 billion from R180 billion. The lower volume was due to a near unbroken and persistent under subscriptions for the 28-day term deposit.

Guinigundo explained that while under subscriptions that started late last year and continued until the first several months of 2017 were due in part to seasonality factors such as banks’ hoarding of cash ahead of higher demand for the holiday and lent season, other reasons emerged. The most recent was banks’ increased lending and residents’ investments abroad.

The issuance of R181 billion worth of treasury bonds earlier this year also led to a drop in banks and trust entities’ placements in the TDF, he added.

Guinigundo reiterated that the objective of IRC is to improve the link between monetary policy stance and financial markets for a better influence on the real economy.

On Wednesday, the central bank will reduce the 28-day tenor auction from R140 billion to R110 billion.

The longer-dated TDF has had this offer size since May this year. It is however the first time the auction volume has been reduced after it was last increased to R180 billion on December 1. The 7-day tenor will continue to have a volume of R40 billion.

Guinigundo highlighted the increased demand for credit for the under subscriptions of past weeks. He also noted that the BSP has siphoned off a significant volume of excess liquidity since June 2016 and any glut in the system has been reduced.

“Banks are now lending more to their clients instead of placing their excess funds with the BSP,” Guinigundo said last week after the auction. “Corporates are also using their peso funds in the banks to buy FX (foreign exchange) for their import requirements; some of them have also been investing outside the Philippines. Some are prepaying their external obligations.”

Guinigundo said based on their weekly liquidity forecasts, TDF auction size is still consistent with their inflation and growth assumptions.