BSP issuing more term deposits to mop up cash

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is ready to siphon off around P100 billion worth of liquidity from the financial system by expanding its auction-based monetary operations through the term deposit auction facility (TDF) next week to check the potential liquidity impact of the reduction in the reserve requirement ratio of banks, according to BSP Governor Nestor Espenilla Jr.

The reduction in the reserve requirement ratio of banks to 18 percent from 19 percent starting June 1, the second in three months, is set to release close to P100 billion in fresh funds that may be used by banks to lend more to sustain the country’s growing economy.

The central bank’s first reduction to 19 percent from 20 percent last March 2 has injected P90 billion in additional liquidity into the financial system.

“In this case around the time when the reserves are released on June 1, we will probably increase our volume, net of what we see is the requirement at the moment of the financial system. That is the way it will continue to roll on going forward,” Espenilla said.

The TDF is a key liquidity absorption facility introduced by the BSP after shifting to the interest rate corridor (IRC) framework in June 2016. The central bank offers seven, 14, and 28-day term deposits through the TDF which is a tool aimed at withdrawing a large part of the structural liquidity from the system to bring market rates closer to the policy rate.

Espenilla said the auction committee determines the volume of the weekly auction based on liquidity forecasts.

“Right now we do it weekly and it is based on the forecast. We forecast from the BSP in terms of what is the liquidity requirement of the system taking into account what the government will do, what banks will do, and what the public will require,” he said.

The BSP has slightly lowered the volume to P110 billion today from last week’s P120 billion. It reduced the size of the 28-day term deposits to be auctioned today to P20 billion instead of P30 billion, but retained the seven-day at P50 billion and 14-day at P40 billion.

 “We are going to pick up excess liquidity through our open market operations. That is where we are coming from since we have made a lot of progress in developing our open market tools. We felt as part of medium to long term reforms that we should also start this process of reducing the obstacles to financial intermediation which actually in the long run is in our collective interest,” Espenilla said.

The BSP chief said the calibrated reductions in reserve requirement ratios are not intended to signal any change in the prevailing monetary policy stance, as the central continues to have the scope to offset their

Shifts in the monetary policy stance will continue to be signaled through adjustments in the policy rate, which will in turn continue to depend primarily on the BSP’s outlook for inflation as informed by economic data.

“We are not at the same time forgetting our co responsibility of keeping our liquidity under control and inflation under control so we can see our way to having good things happening,” he said.

The central bank lifted rates by 25 basis points for the first time in more than three years last May 10 to arrest potential second round effects by tempering the buildup of inflation expectations.

“So we’ve raised the policy rate and we may raise it some more depending on the data and at the same time we are continuing with the reforms that we have started,” Espenilla said.