BSP eyes higher TDF volume soon
It would take higher volume of term deposit auctions to enable the interest rate corridor (IRC) system to effectively guide market rates closer to the central bank policy rate, according to a Bangko Sentral ng Pilipinas (BSP) official.
The Term Deposit Facility (TDF) since it began early June has been consistently 5x oversubscribed. The financial markets eye such oversubscriptions as indications of a very liquid domestic market.
“TDF (term deposit facility) auctions will be small in the beginning,” said BSP deputy governor Diwa C. Guinigundo. This is because the IRC will be gradually implemented and must be consistent with the initial fine-tuning or testing phase.
The BSP though has started to increase the TDF volume from R30 billion to R50 billion, and to R70 billion beginning this month.
“Volume will be gradually scaled up to enable convergence of market interest rates to BSP policy/target rate,” said Guinigundo.
Since the TDF is a liquidity management tool, it does withdraw excess liquidity from the markets.
Guinigundo said auction results can provide indicative benchmark for short-term money market rates. “(The) impact of TDF on market rates will increase as volume of TDF offering rises,” he added.
TDF auctions have been consistently oversubscribed. It was oversubscribed during last Wednesday’s auction R185.148 billion. The BSP offered and awarded the full R50 billion at a yield of 2.5 percent for the 7-day and 28-day term deposits.
The BSP initially offered total tenders of R30 billion in its first weeks of TDF. Because of a very liquid market, the amount was raised to R70 billion on August 3.
The facility is limited to fund management activities of trust accounts and with respect to pooled funds, the BSP said only unit investment trust funds are allowed access to the TDF and overnight deposit facility.
The BSP implemented the interest rate corridor or IRC system last June 3.
The BSP’s TDF auction is held every Wednesday for now but the BSP said it is open to discussions of increasing auction frequency.
The interest rate for overnight lending facility is 3.5 percent, overnight RRP rate is three percent and the overnight deposit facility is 2.5 percent.
The TDF, in the meantime, is expected to acquire a rate that is estimated to be between the RRP and overnight deposit facility or ODF, formerly special deposit accounts.
Guinigundo said BSP will reduce banks’ reserve requirements when the ODF drops by R500 billion. The volume is a little below R1 trillion as of mid-July. He noted that the volume of the SDA facility has already shed off R130 billion from R1 trillion as a result of its TDF auction.