Yields on the Bangko Sentral ng Pilipinas' (BSP) term deposits extended their climb for an eighth consecutive week, driven by soft demand and growing market expectations that benchmark interest rates will remain elevated for longer even as economic growth slows and inflation stays above target.

Tenders for the central bank's term deposit facility (TDF) totaled P118.998 billion on Wednesday, falling short of the P130-billion offering of seven-day papers and down from P129.622 billion in bids for the P150 billion auctioned the previous week. The bid-to-cover ratio improved slightly to 0.9154 times from 0.8641 times a week earlier, though it remained below 1.0, indicating continued undersubscription. The BSP accepted P118.948 billion of the tenders in an effort to limit the rise in yields.

Accepted yields for the one-week deposits ranged from 4.7% to 4.78%, a higher but narrower band compared with the 4.6125%–4.77% range in the prior auction. The weighted average accepted rate inched up by 0.67 basis point (bp) to 4.749% from 4.7423% a week earlier. Because TDF yields serve as a reference for short-term interbank rates, the persistent upward drift signals that banks are pricing in a prolonged period of tight monetary conditions, which typically feeds through to higher borrowing costs for businesses and households.

Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort attributed the continued rise in TDF yields to remarks by BSP Governor Eli M. Remolona, Jr., who indicated the central bank could tighten monetary policy as much as necessary to steer inflation back toward its 3% target.

"BSP TDF auction yields continued to go up slightly in recent weeks, despite slower-than-expected headline inflation at 6.2% in July 2026… (and) weaker-than-expected local GDP growth of 2.3%, among the slowest in more than five years," Mr. Ricafort said via Viber. "BSP Governor Remolona reiterated recently a possible BSP rate hike at the next BSP rate-setting meeting on Aug. 27."

Governor Remolona noted earlier this week that the tepid second-quarter output somewhat eases the pressure to raise rates further, but he maintained a hawkish tone, saying the central bank has yet to see sustained disinflation. The BSP thus faces a classic policy dilemma: inflation has breached its tolerance band for five consecutive months, yet the economy is expanding at its weakest pace outside the pandemic in over 16 years.

In July, headline inflation eased to a four-month low of 6.2%, down from 6.4% in June and below the 6.4% median estimate from a BusinessWorld poll of 21 economists and analysts. Nevertheless, this marked the fifth straight month that the headline reading exceeded both the BSP's 3% target and its 2%–4% tolerance band.

GDP growth, meanwhile, plunged to a new post-pandemic low of 2.3% in the second quarter, decelerating from 2.8% in the first quarter and 5.4% a year earlier. The median forecast from a BusinessWorld survey of 21 economists and analysts had been 2.8%. The result represented the economy's weakest showing since a 3.8% contraction in the first quarter of 2021. Excluding the pandemic period, it was the slowest pace in over 16 years, dating back to the 1.8% recorded in the fourth quarter of 2009.

Headline inflation averaged 5% through July, while GDP growth stood at 2.6% for the first half of the year. The first-half GDP figure also tracked well below the government's full-year growth target, underscoring the tension between the BSP's price-stability mandate and the broader economic slowdown.

The Monetary Board initiated its tightening cycle in April, when the global energy shock stemming from the Middle East conflict threatened its inflation outlook. It has since delivered a cumulative 50 bps in rate hikes, bringing the benchmark interest rate to 4.75%. Three more policy reviews are scheduled this year, on Aug. 27, Oct. 22, and Dec. 17.

The BSP deploys the TDF and BSP bills to absorb excess liquidity from the financial system and to better align market yields with its policy rate. It has restricted TDF offerings to a single tenor to streamline liquidity operations and concentrate on maturities that enhance monetary policy transmission.

As of early June, the BSP's market operations had absorbed P1.3 trillion in excess liquidity, with 6.9% of that amount siphoned through the term deposit facility.

— Katherine K. Chan