The rapidly growing Philippine economy has also increased the demand for bank loans from corporate and retail borrowers such that the central bank now feels more comfortable reducing its regular liquidity siphoning operations.
On Wednesday, the Bangko Sentral ng Pilipinas (BSP) announced a reduction in its term deposit facility borrowings from P180 billion a week to P150 billion—a 16-percent cut in the amount of cash that monetary regulators freeze out of the financial system every seven days in an effort to prevent liquidity from pushing inflation rate up.
The reduction was made in the 28-day borrowing window, which was reduced to P110 billion a week starting September 6, 2017 from the previous level of P140 billion. The volume for the seven-day facility will remain unchanged at P40 billion.
“The decision to reduce the volume offering is based on the recognition that the sustained economic expansion has also given rise to higher demand for credit,” BSP Deputy Governor Diwa Guinigundo said in a text message sent to reporters. “Banks are now lending more to their clients instead of placing their excess funds with the BSP.”
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The term deposit facility was opened by the BSP several years ago at the height of the quantitative easing exercise by the US Federal Reserve and other developed world central banks, which was meant to pump prime the world’s largest economies, but had the unwanted side effect of aggravating inflationary measures in other countries to which the cash flowed.
BSP responded by trying to siphon off as much cash from the local financial system—in part, to prevent the creation of so-called “asset price bubbles”—but ended up losing billions of pesos to interest payments to banks.
