The central bank of the Philippines witnessed a notable shift in its short-term deposit auctions this week, as demand surged and interest rates edged lower. This movement signals growing anticipation of continued monetary easing, fueled by expectations of a calmer inflation outlook.
Wednesday’s auction of seven-day term deposits drew a remarkable P135.643 billion in bids, significantly exceeding the P80 billion offered. This robust demand allowed the central bank to fully award the available funds, indicating strong investor appetite.
Yields on these short-term deposits narrowed to a range of 4.6% to 4.7408%, a slight decrease from the previous week’s 4.6% to 4.7497%. Consequently, the average rate for these one-week deposits dipped by 0.94 basis points to 4.728%.
For the fifth consecutive week, the central bank opted not to offer 14-day term deposits, continuing a trend established since October 2020. This strategy prioritizes weekly offerings of securities with similar tenors, reshaping the landscape of liquidity management.
These term deposit facilities and central bank bills serve a crucial purpose: absorbing excess funds from the financial system and subtly influencing market interest rates to align with the central bank’s policy objectives.
Analysts point to the heightened demand as a primary driver of the lower rates. Michael Ricafort, Chief Economist at Rizal Commercial Banking Corp., explained that increased bidding pressure naturally pushes yields downward.
Adding to this dynamic is the expectation of a further decline in November inflation. Forecasts suggest a reading of around 1.6%, falling within the central bank’s projected range of 1.1% to 1.9%. This anticipated slowdown strengthens the case for another rate cut at the upcoming policy meeting.
If realized, this 1.6% inflation rate would represent a decrease from October’s 1.7% and a more substantial drop from the 2.5% recorded a year prior. It would also mark the ninth consecutive month that inflation remains below the central bank’s target of 2-4% annually.
Central bank Governor Eli Remolona, Jr. acknowledged that slowing economic growth further increases the likelihood of a rate reduction at the December 11th meeting. The bank has already implemented a cumulative 175 basis points of rate cuts since August of last year.
These cuts have brought the policy rate to a more than three-year low of 4.75%, reflecting the central bank’s commitment to supporting economic activity. However, the Governor also cautioned that GDP growth is currently lagging behind government targets.
The Philippines’ economic growth slowed to 4% in the third quarter, the lowest rate in over four years. This deceleration is attributed, in part, to a corruption scandal involving state infrastructure projects, which has dampened investor confidence.
Despite these challenges, the central bank anticipates a recovery by mid-2026. The current year’s GDP growth is projected to fall between 4% and 5%, significantly below the government’s initial goal of 5.5-6.5%.
The economic slowdown underscores the delicate balance the central bank faces: stimulating growth while maintaining price stability. The upcoming policy decision will be closely watched as a signal of the bank’s strategy for navigating these complex economic currents.
