Cut in term deposit volume due to tight liquidity, says BSP

Tight liquidity brought about by the efforts of the Bangko Sentral ng Pilipinas (BSP) to smoothen the volatility of the peso in the foreign exchange market has prompted the central bank to reduce the volume of the term deposit auction facility (TDF) next week.

BSP Governor Nestor Espenilla Jr. said there is reduced appetite for term deposits due to tighter conditions in the financial system.

“Based on BSP liquidity forecast, TDF demand would be reduced because of tighter peso liquidity due to BSP foreign exchange market operations,” Espenilla said.

The BSP auction committee lowered the volume of the TDF to P70 billion next Wednesday from P100 billion. The last time the central bank tweaked the volume of the facility was last June to P100 billion from the previous level of P110 billion.

The volume of the 14-day tenor was slashed to P20 billion from P40 billion, while the size of the 28-day term deposit was also lowered to P10 billion from P20 billion.

On the other hand, the 14-day offering was retained at P40 billion.

The facility used as a key liquidity absorption tool by the BSP was undersubscribed. It is tasked to withdraw a large part of the structural liquidity from the financial system to bring market rates closer to the BSP policy rate.

Term deposits fetched record high rates last Wednesday as banks continued to recalibrate their bids to factor in more rate hikes by the central bank.

BSP Deputy Governor Diwa Guinigundo said the auction committee needs to scale down its open market operation accordingly due to less excess structural liquidity in the system.

“We continue to see based in our liquidity monitoring and forecasting that banks have been able to make robust lending, higher foreign exchange purchases for cor- porate clients and investment, resulting in more moderate placement in TDF facility,” Guinigundo said.

According to Guinigundo, banks continue to lend to productive activities amid the sustained expansion of the economy.

“This is good because the economy is able to make fuller use of domestic liquidity to sustain economic activity,” Guinigundo said.

Traders said the BSP has been active in the foreign exchange market, smoothening the volatility of the peso amid the expected rate hike by the US Federal Reserve, emerging market contagion as well as domestic market concerns including the runaway inflation and weak peso.