Ample liquidity seen in the financial system
THE central bank awarded on Wednesday P30-billion worth of its term deposit facility (TDF)—P10 billion in the seven-day tenor and P20 billion in the 28-day tenor—rejecting most of the nearly P200 billion tenders for the maiden auction of the liquidity management tool under the Interest Rate Corridor.
Of the total tenders, P82.438 billion was for the seven-day term deposit, and P117.271 billion for the 28-day term deposit—far exceeding the P10 billion and P20 billion set respectively for the auction.
The Bangko Sentral ng Pilipinas (BSP) and financial analysts said the high level of oversubscription indicates ample money supply in the financial system to support economic activity.
BSP Governor Amando Tetangco Jr. said the first TDF auction was oversubscribed with the auction priced at an average of 2.5 percent for both tenors.
Bid-to-cover was more than eight times, and for both seven-day and 28-day auctions, almost six times, he added.
“We are pleased with how the auctions were conducted without any technical hitch. That the auction was filled at the same rate as the ODF [overnight deposit facility]seems to indicate that there is still significant liquidity in the system, which we expect will be siphoned off in the ODF throughout the day,” Tetangco said in a text message to reporters.
He said the central bank would make adjustments to the amount of the TDF auctions as conditions warrant.
“We expect that as the banks become more familiar with the facility, and the TDF auction amounts become refined, we shall see rates gradually move toward the BSP policy rate,” he added.
According to the senior economist at the Dutch financial giant ING bank, Joey Cuyegkeng, the seven-day and 28-day term deposit rates at 2.5 percent are a reflection of the acceptable interest rates as the banks were still operating in the previous special deposit account environment. Besides, the TDF auction results indicated that there is still substantial liquidity in the system, he said.
“Together with the higher M3 [domestic liquidity]and loan growth rates for April there is no compelling reason to change monetary policy” he said. Inflation, he added, is “generally on the up trend but at a relatively mild incline.”
Economic activity in second quarter, Cuyegkeng said, is expected to remain strong but will moderate in the second half this year. Growth expectations for 2017 remains favorable at six percent which would also argue for a steady monetary policy,” he said.
Meanwhile, the economist at the University of Asia and the Pacific, Dr. Victor Abola, said the TDF auction results are aligned with the floor rate of 2.5 percent for ODF, which banks and trust entities may access.
“It means there is still much liquidity in the financial system such that they are going for the floor rates instead of waiting for another week for possibly higher rates,” he said.
The TDF is a key liquidity absorption facility, commonly used by central banks for liquidity management.
Because of the BSP’s inability to issue its own debt instruments, the TDF will be tasked to withdraw a large part of the structural liquidity from the financial system to bring market rates closer to the BSP policy rate.
The possibility of offering longer tenors will be evaluated, depending on the liquidity needs and preferences of the market.
The second TDF auction is set for June 15. Of the P30 billion total volume offering, P10 billion is for a seven-day tenor and P20 billion for 28-day tenor.
The window time for TDF auction is 30 minutes starting 10 a.m. with minimum bid amount of P10 million, and maximum bid amount of 20 percent of the auction size per tenor.