Recent auctions of short-term deposits revealed a cooling in market demand, with bids totaling P76.657 billion against an offered P80 billion. This marks a significant shift from previous auctions, notably the P171.256 billion in bids for a similar offering just weeks prior.
The central bank ultimately accepted P72.657 billion in bids, a deliberate move reflecting adjustments to the auction schedule due to the approaching holidays. The tenor, typically seven days, was shortened to ten, and the auction day shifted from Wednesday to Tuesday.
Yields on the accepted 10-day deposits showed a wider range, fluctuating between 4.44% and 4.55%, compared to the previous auction’s tighter band. This resulted in a slight decrease in the average rate, dipping by 2.14 basis points to 4.5076%.
The central bank noted the decline in the term deposit facility rate, attributing it to a bid-to-cover ratio of 0.96x – a considerable drop from the previous week’s 2.14x. This ratio indicates a lessened appetite for these short-term investments.
For the first time in two months, the 14-day tenor was absent from the offerings, last appearing on October 29th. Longer-term 28-day deposits have also been largely discontinued for over five years, replaced by weekly securities with similar durations.
These term deposit facilities and central bank bills serve a crucial purpose: managing excess liquidity within the financial system and influencing market yields to align with the central bank’s policy objectives. They are key tools in maintaining economic stability.
Analysts suggest the lower yields reflect anticipation of further policy easing, potentially another 25-basis-point rate cut in 2026, particularly if economic recovery remains sluggish. This expectation is coupled with signals of potential easing from the US Federal Reserve.
Market activity has slowed as the year draws to a close, contributing to the weaker demand observed in the auctions. Investors are carefully assessing the economic landscape and adjusting their strategies accordingly.
The Monetary Board recently implemented its fifth consecutive 25-basis-point rate cut, bringing the policy rate to a three-year low of 4.5%. This represents a total reduction of 200 basis points since August 2024, a substantial easing of monetary policy.
Central bank Governor Eli M. Remolona, Jr. emphasized that manageable inflation provides the space to bolster domestic demand, which has been hampered by ongoing concerns. However, he cautioned that the easing cycle is nearing its conclusion.
Despite this, the possibility of one final 25-basis-point cut in the coming year remains open, particularly given the darkening economic outlook. The slowdown experienced in the third quarter is projected to continue, with a full recovery not anticipated until the second half of 2026.
The Monetary Board’s first meeting of 2026 is scheduled for February, where these economic factors will be further evaluated. The decisions made then will be critical in shaping the country’s monetary policy for the year ahead.
Meanwhile, the US Federal Reserve’s recent rate cut has positioned its benchmark short-term borrowing costs within the upper range of what policymakers consider a neutral level. However, internal debate within the Fed suggests some disagreement regarding the necessity of this cut.
Further contributing to the downward pressure on yields is the potential for a reduction in big banks’ reserve requirement ratio (RRR). A proposed 300-basis-point decrease would inject additional liquidity into the financial system, stimulating economic activity.
