Yields on term deposits rise amid growing inflation risks

Yields on the term deposits auctioned off by the Bangko Sentral ng Pilipinas (BSP) edged higher on Wednesday as global crude oil prices rose and the peso depreciated to a two-month low against the dollar, which could affect inflation.

Demand for papers under the BSP’s term deposit facility (TDF) totaled PHP 297.282 billion on Wednesday, lower than the PHP 300 billion on the auction block. However, this is higher than the PHP 280.088 billion in bids logged last week for the PHP 280-billion offer.

Broken down, the seven-day deposits attracted tenders amounting to PHP 167.147 billion, above the PHP 160-billion offering and the PHP 151.358 billion in bids recorded the prior week for a PHP 150-billion offer.

Rates for the one-week papers ranged from 6.57% to 6.61%, slightly narrower than the 6.559% to 6.61% range logged in the previous week. This brought the average rate for the tenor to 6.5932%, inching up by 0.44 basis point (bp) from the 6.5888% seen on Aug. 2.

For the 14-day deposits, tenders hit PHP 130.135 billion, below the PHP 140-billion offering but slightly above the PHP 128.730 billion in bids seen last week for the PHP 130 billion on the auction block.

Accepted yields were from 6.5% to 6.62%, unchanged from the previous week. Still, the average rate of the two-week deposits went up by 0.71 bp to 6.5974% from the 6.5903% logged a week ago.

The central bank has not auctioned off 28-day term deposits for more than two years to give way to its weekly offering of securities with the same tenor.

The term deposits and the 28-day bills are used by the BSP to mop up excess liquidity in the financial system and to better guide market rates.

TDF yields were higher week on week after global crude oil prices went up, which could affect inflation, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

Brent crude futures and US West Texas Intermediate (WTI) gained nearly $1 on Tuesday. Brent crude futures gained 83 cents to $86.17 a barrel while US WTI crude rose 98 cents to $82.92, Reuters reported.

Yields went up amid the peso’s depreciation against the greenback, which could also lead to higher import prices and inflation, Mr. Ricafort added.

The peso weakened to a two-month low against the dollar on Tuesday due to hawkish remarks from a US Federal Reserve official.

The local currency closed at PHP 56.24 versus the dollar on Tuesday, weakening by 22 centavos from Monday’s PHP 56.02 finish, data from the Bankers Association of the Philippines’ website showed.

This was the peso’s weakest close in over two months or since its PHP 56.26-per-dollar close on June 1.

Additional interest rate hikes will likely be needed in order to lower inflation to the Fed’s 2% target, Fed Governor Michelle Bowman said on Monday.

The Fed raised borrowing costs by 25 bps last month, bringing its target interest rate to a range between 5.25% and 5.5%.

The US central bank has hiked rates by a cumulative 525 bps since it began its tightening cycle in March last year.

The Federal Open Market Committee will hold its next policy meeting on Sept. 19-20.

Meanwhile, the BSP expects inflation to return to its 2-4% annual target before the year ends.

Headline inflation slowed to 4.7% in July from the 5.4% in June, its sixth straight month of decline.

From January to July, inflation averaged 6.8%, still higher than the 5.4% forecast of the central bank. — K.B. Ta-asan with Reuters