Term deposit facility yield jumps

THE CENTRAL BANK’S term deposit facility (TDF) fetched a higher average yield on Wednesday despite drawing strong demand, following its latest rate hike and expectations of further policy tightening.

The seven-day term deposits offered by the Bangko Sentral ng Pilipinas (BSP) attracted P147.021 billion in tenders, above the P110 billion placed on the auction block and the P143.646 billion in bids recorded for same offer volume last week.

This was equivalent to a bid-to-cover ratio of 1.3366 times, higher than the 1.3059 ratio in the prior week.

With this, the BSP awarded its entire P110-billion offer.

Accepted rates for the one-week papers ranged from 4.25% to 4.74%, higher than the 4% to 4.5% band seen in the previous auction. This caused the weighted average accepted rate for the term deposits to jump by 18.6 basis points (bps) week on week to 4.6244% from 4.4384%.

“The seven-day BSP TDF average auction yield went up week on week…, largely due to the latest 25-bp BSP rate hike to 4.75% (and) signals of further BSP rate hike at the next rate-setting meeting on Aug. 27,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

This came as the central bank expects headline inflation to remain well above its 2%-4% tolerance range this year and next, he said.

Still, the average rate was below the BSP’s key rate amid strong demand, which could signal excess peso liquidity in the financial system, he added.

The Monetary Board last week raised benchmark interest rates by 25 bps for a second straight meeting, bringing the policy rate to 4.75%.

The central bank now already hiked benchmark borrowing costs by a total of 50 bps this year as the global oil price shock due to the Middle East war that erupted late February caused domestic consumer prices to spike, also affecting inflation expectations.

BSP Governor Eli M. Remolona, Jr. said they have “a lot of room” to tighten further as they now see inflation settling at 6.4% this year and 4.5% next year, slightly faster than previous forecasts of 6.3% and 4.3%, respectively.

As of May, the consumer price index averaged 4.5%.

Hawkish signals from the US Federal Reserve also caused term deposit yields to rise, Mr. Ricafort added.

Expectations of a US rate hike continued to build with Fed officials sounding increasingly hawkish as the economy remains strong, Reuters reported. Markets are pricing in a 36% chance of a hike at the July meeting, up from 8.5% a week ago, according to CME FedWatch. For September, the chance of a rate rise has risen above 70% from 29.1%.

Last week, the Fed held interest rates steady as expected, but new projections and comments from Kevin Warsh, who was presiding over his first meeting as chair, blindsided traders and led markets to price in a possible hike within months.

Investors are now confronting a more opaque Fed under Mr. Warsh, one that is retreating from forward guidance and overhauling its messaging — a shift that could inject fresh volatility into markets.

His first policy statement dropped guidance on the future path of rates, while he signaled possible changes to how the Fed communicates, interprets data and approaches inflation.

Markets entered 2026 pricing in more rate cuts, but that flipped after the late-February US-Israeli war with Iran drove up energy prices and inflation, shifting bets toward a possible year-end hike. Recent data have shown inflation running well above the Fed’s 2% annual target, a target that Mr. Warsh reaffirmed last week.

The meeting boosted the market’s hawkish bets. The Fed’s quarterly projections showed nine Fed officials now anticipate a hike in rates by the end of 2026.

The central bank uses the TDF and BSP bills to mop up excess liquidity in the financial system and better guide market yields towards its policy rate.

In its latest Monetary Policy Report, the central bank said it limited its TDF offerings to a single tenor to rationalize liquidity operations and focus on tenors that would boost monetary policy transmission.

As of mid-February, the BSP’s market operations have absorbed P1.2 trillion in excess liquidity from the market, with 9% of this being siphoned off via the term deposit facility. — Katherine K. Chan with Reuters