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Inflation expectations driving higher bids under TDF

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term deposit facility (TDF)
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EXPECTATIONS of rising inflation and rising global yields are prompting banks to seek bigger margins for term deposits despite abundant money supply, a central bank official said.

Rates fetched under the term deposit facility (TDF) rose further during this week’s auction even as bank bids went above the P110-billion auction volume set by the Bangko Sentral ng Pilipinas (BSP).

Bids for term deposits reached P133.034 billion on Wednesday to pick up from the P124.31 billion tenders received the previous week. Despite the oversubscription, players still asked for bigger margins for parking their idle funds under the BSP window, defying the expected trend for rates.

In particular, average rates for the seven-day and 14-day instruments inched higher by around five basis points, while the yield for 28-day deposits stood barely changed from a week ago.

“Demand for higher rate is driven by what banks believe to be mounting inflationary pressure that should warrant higher returns on top of the likelihood of a US rate hike,” BSP Deputy Governor Diwa C. Guinigundo said in a text message late Wednesday.

Inflation clocked in at 4.3% for March under the 2012 base year, the Philippine Statistics Authority said. This meant a sustained pickup in prices for the fourth straight month to surpass the 2-4% target band set by the central bank.

Several analysts have been flagging the need for the BSP to raise policy rates in order to contain inflation, although central bank officials have said that they are carefully assessing liquidity and financial conditions.

“[B]ased on the information we have today, we need to continue monitoring any sign of second-round effects in terms of demand for higher wages and transport fare,” Mr. Guinigundo said, noting that the inflation outlook for 2018 and 2019 remain within target.

As of their March meeting, the Monetary Board sees inflation averaging 3.9% this year before decelerating to 3.1% in 2019.

The TDF stands as the central bank’s main tool in capturing excess funds in the financial system. Through this, the BSP expects to bring market rates closer to its 3% benchmark rate and prod the firms to pursue interbank lending.

The BSP is also relying on the weekly auctions to shore up idle funds, especially after the regulator trimmed the reserve requirement ratio imposed on universal and commercial banks to 19% of deposits which took effect March 2.

Meanwhile, global yields are consistently on the rise following the decision of the United States Federal Reserve to raise borrowing rates by 25 basis points last month.

Fed chair Jerome H. Powell said earlier this week that they will stay on with their plan to introduce “gradual” increases in the federal funds rate amid strong US economic growth, in order to stoke inflation and sustain job growth. — Melissa Luz T. Lopez