Term deposit yields decline on expectations of rate hike pause

YIELDS on the Bangko Sentral ng Pilipinas’ (BSP) term deposits dropped on Wednesday following signals that the central bank could pause its tightening cycle next month if inflation eases further in April.

Demand for the BSP’s term deposit facility (TDF) amounted to PHP 329.972 billion on Wednesday, higher than the PHP 300-billion offer but below the PHP 409.621 billion in tenders seen a week earlier for the same amount on the auction block.

“The BSP retained the volume offering for the TDF auction at P300 billion, with the allocation between the 7-day and 14-day tenors still at PHP 170 billion and PHP 130 billion, respectively,” BSP Deputy Governor Francisco G. Dakila, Jr. said in a statement.

Broken down, the seven-day term deposits fetched bids amounting to P184.251 billion, surpassing the PHP 170 billion auctioned off by the BSP but lower than the PHP 251.915 billion in tenders logged the previous week for the same offer.

Accepted rates for the tenor ranged from 6.3% to 6.6288%, wider than the 6.375% to 6.64% band logged a week ago. This caused the average rate of the one-week deposits to slip by 0.3695 basis point (bp) to 6.5902% from 6.5939% previously.

Meanwhile, demand for the two-week deposits amounted to PHP 145.721 billion, higher than the PHP 130-billion offer but below the PHP 157.706 billion seen in the previous auction.

Banks asked for yields from 6.5% to 6.64%, a tad lower than the 6.5995% to 6.6566% range seen last week. This caused the average rate of the paper to dip by 2.0994 bps to 6.6153% from the 6.6362% quoted on April 12.

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

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

“The results of the auction reflected market participants’ sustained demand for the TDF. Moving forward, the BSP’s monetary operations will remain guided by its assessment of the latest liquidity conditions and market developments,” Mr. Dakila said.

TDF yields went down following signals of a possible pause in BSP rate hikes, Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

BSP Governor Felipe M. Medalla said in an economic briefing last week that the Monetary Board may consider pausing its tightening cycle at its meeting next month.

“We’re probably near the end [of our tightening cycle]. We’re probably [considering] pausing at the next meeting because the [month-on-month] inflation prints are very good. If April turns out to be another very low inflation month, so that’s three good points in a row, then we are in a position to pause,” Mr. Medalla said.

The Philippine Statistics Authority will release April inflation data on May 5.

The Monetary Board will next meet to discuss policy on May 18.

Headline inflation slowed to 7.6% in March from 8.6% in February, bringing the first-quarter average to 8.3%, still well above the central bank’s full-year forecast of 6% and the 2-4% target.

The Monetary Board has raised borrowing costs by 425 bps since May last year — including the 25-bp hike last month — bringing the benchmark rate to 6.25%, the highest since 2007.

The central bank chief also signaled that they may cut policy rates this year if inflation eases further for the next six months.

However, Mr. Ricafort said the BSP could still match the US Federal Reserve next month, with the market expecting another 25-bp rate hike at their meeting on May 2-3.

The Fed has hiked borrowing costs by a total of 475 bps since March 2022, with the fed funds rate now at a range between 4.75% and 5%. — By Keisha B. Ta-asan