Yields on the Bangko Sentral ng Pilipinas' (BSP) term deposit facility rose again on Wednesday, with the auction oversubscribed even as higher oil prices and a weakening peso reinforced the case for additional monetary policy tightening.

Demand for the seven-day term deposit facility (TDF) reached P137.579 billion, surpassing the P120 billion placed on the auction block but falling short of the P148.137 billion in tenders recorded last week for a larger P130-billion offering. The result translated into a slightly higher bid-to-cover ratio of 1.1465 times, up from 1.1395 at the previous auction, and the central bank awarded its entire offering. A bid-to-cover ratio above one indicates that bids exceeded the amount on offer.

Accepted yields on the one-week papers narrowed to a range of 4.9% to 5.02%, from 4.85% to 5.03% in the prior week. This pushed the weighted average accepted rate up by 1.64 basis points (bps) to 4.9924% from 4.976% a week earlier. One basis point equals one-hundredth of a percentage point.

"The seven-day BSP TDF average auction yield was again slightly higher week on week… amid the continuing effects of the latest 25-bp BSP rate hike to 5% on Aug. 27… and signals of further monetary tightening as much as needed to bring down inflation back to the BSP's target of 2%-4%," Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a Viber message.

Last month, the Monetary Board raised benchmark rates for a third consecutive meeting in a preemptive move to temper inflation risks from a looming severe El Niño, wage hikes, and volatile global oil prices. The policy rate was lifted by 25 bps to an over one-year high of 5%, bringing cumulative increases since the tightening cycle began in April to 75 bps. Such preemptive tightening is designed to keep inflation expectations anchored before price pressures build.

BSP Governor Eli M. Remolona, Jr. said the central bank hopes it will not have to hike further, but has kept additional tightening on the table to ensure inflation returns near its 3% target.

Headline inflation eased to a four-month low of 6.1% in August, marking the sixth straight month of above-target prints. Year to date, the consumer price index has averaged 5.2%. The BSP expects inflation to peak in the fourth quarter and end the year at 6.1%.

In its latest Monetary Policy Report published last week, the central bank also hinted at a potential fourth consecutive rate hike in October.

Mr. Ricafort said surging global oil prices and the peso's underperformance against the dollar amid the re-escalation of the Middle East war may prompt the central bank to tighten anew. The Monetary Board has two remaining rate-setting meetings this year, scheduled for Oct. 22 and Dec. 17 — with oil prices, the peso, and incoming inflation data the key variables heading into those sessions.

On Wednesday, Brent crude futures fell $1.22, or 0.67%, to $107.53 a barrel at 0655 GMT, while US West Texas Intermediate futures were down $1.64, or 1.55%, to $104.19 a barrel, Reuters reported.

Meanwhile, the peso weakened for a second straight trading session on Monday, closing at a record low of P62.86 against the greenback, based on Bankers Association of the Philippines data. It also hit its worst intraday level in history at P62.925 on Tuesday.

The central bank uses the TDF and BSP bills to mop up excess liquidity in the financial system and better guide market yields toward its policy rate. It earlier said it limited its TDF offerings to a single tenor to rationalize its liquidity operations and focus on tenors that would strengthen monetary policy transmission. Banks bid to place their surplus funds at these regular auctions, and the awarded yields help shape short-term money-market rates.

As of mid-August, the BSP's market operations had absorbed P975.4 billion in excess liquidity from the market, with 12.3 of that siphoned off via the term deposit facility. — Katherine K. Chan