Philippine central bank term deposit yields rise as demand stays below offer

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Central bank deposit yields rise

Highlights

BSP's seven-day term deposit facility drew P74.66 billion in bids versus an P80-billion offer, with weighted average yield climbing 7.03 basis points to 5.5429%.
BSP's 50-basis-point rate hike to 5.5% last month, totaling 125 basis points since April, reflected in market yields amid expectations of 7.6% October inflation.
BSP expects inflation at 6.1% in 2023 and 6% in 2024, but soft GDP data reduces odds of further rate hikes despite continued tightening signals.

Latest auction reflects tighter policy stance

As reported by BusinessWorld Online, the Bangko Sentral ng Pilipinas' term deposit facility attracted P74.66 billion in bids for its seven-day papers on Wednesday, below the P80-billion offer but above the P65.336 billion tendered against P100 billion a week earlier.

The BSP awarded P74.36 billion in papers. The bid-to-cover ratio improved to 0.9333 from 0.6534 the previous week, while accepted yields ranged from 5.3% to 5.7%, narrower than the earlier 5% to 5.7% band.

The weighted average accepted yield rose by 7.03 basis points to 5.5429% from 5.4726% previously. Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort says the higher average yield is largely driven by the BSP's recent jumbo rate hike and expectations that October inflation is faster than the September pace.

Inflation outlook shapes market expectations

A BusinessWorld poll of 22 analysts conducted last week showed a median estimate of 7.6% for October headline inflation. If realized, that would mark the fastest pace in nearly four years, matching the March 2023 reading and coming after inflation remained above the central bank's 3% target for seven straight months.

Year to date, inflation averages 5.4%. Last month, the BSP raised its key policy rate by 50 basis points to 5.5%, its fourth straight increase and a cumulative 125 basis points of tightening since April, as it seeks to contain broader price pressures.

BSP Governor Eli M. Remolona, Jr. says the central bank remains on a tightening path as inflation continues to run hot. The BSP expects inflation at 6.1% this year and 6% next year before easing to 3.3% in 2028, although Remolona says a wider negative output gap based on third-quarter gross domestic product data reduces the odds of additional hikes.

The central bank uses the term deposit facility and BSP bills to absorb excess liquidity and guide market yields toward its policy rate. It has also limited TDF offerings to a single tenor as it rationalizes liquidity operations and focuses on maturities that strengthen monetary policy transmission.

Our earlier coverage of planned reforms to Philippine peso-denominated government bonds explained how a new pricing convention and expected inclusion in a major emerging-market bond index could improve liquidity, price discovery, and broaden the investor base. It also noted that these market benefits are not automatic, as yields and sustained inflows still depend on global rates and fiscal credibility, and that deeper capital-market development requires wider structural reforms beyond trading modernization.

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