Yields on the Bangko Sentral ng Pilipinas' (BSP) term deposits edged higher for a sixth consecutive week, as market participants factor in the possibility of further interest rate increases while monetary authorities maintain a hawkish stance amid ongoing inflation risks.

Demand for the BSP's seven-day term deposit facility (TDF) reached P137.524 billion on Wednesday, exceeding the P130 billion on offer but declining from the P171.444 billion in bids for the same volume the previous week. The bid-to-cover ratio fell to 1.0579 times, down from 1.3188 times at the prior auction. Nevertheless, the BSP fully awarded its P130-billion offering following the oversubscription.

Accepted rates for the one-week deposits ranged from 4.5% to 4.77%, a narrower and higher band compared with the 4.25% to 4.7499% range recorded a week earlier. The weighted average accepted rate accordingly rose by 1.1 basis points (bps) to 4.732% from 4.721%.

According to Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort, the higher average TDF yield came as BSP Governor Eli M. Remolona, Jr. left the door open to more aggressive policy action given persistent inflation pressures, even as he indicated that the likelihood of an outsized move remained small. Ricafort noted that the rate still sat below the BSP's key overnight borrowing rate of 4.75%, reflecting ample liquidity in the financial system, as evidenced by robust demand for the offering.

Speaking to reporters on Tuesday, Mr. Remolona said the central bank sees a "small chance" that ongoing volatility and emerging inflation threats could prompt a 50-bp rate hike. He cited expected inflationary pressures stemming from a weaker peso and President Ferdinand R. Marcos, Jr.'s proposed tax reforms.

As of June, inflation averaged 4.8%, with the headline figure remaining above the central bank's 3% target since the Middle East war erupted in late February. The BSP projects inflation to average 6.4% for the year, well above the government's 3% to 5% target band for 2025.

Since April, the Monetary Board has raised benchmark interest rates by a cumulative 50 bps, as higher global oil prices driven by the Middle East conflict continue to threaten the country's inflation outlook and push up consumer costs. Policymakers have signaled readiness to take further action to rein in domestic prices and keep inflation expectations anchored. The tightening cycle places the BSP alongside several other emerging-market central banks in Asia that have had to balance growth concerns against inflation and currency stability pressures in recent months.

The Monetary Board's next rate-setting meeting is scheduled for Aug. 27, with two additional policy reviews set for Oct. 22 and Dec. 17.

On July 24, the peso slumped to its worst-ever close against the U.S. dollar at P61.847, breaking the previous record of P61.75, according to Bankers Association of the Philippines data. A weaker peso raises the cost of imported goods such as fuel and food, compounding the inflationary pressures the BSP is working to contain.

Meanwhile, in his State of the Nation Address on Monday, President Marcos urged Congress to pass several tax measures, including raising the income tax exemption threshold to ease the financial burden on low- and middle-income earners, as well as providing tax breaks for micro, small, and medium enterprises.

The central bank deploys the TDF and BSP bills to absorb excess liquidity from the financial system and to better guide market yields toward its policy rate. It previously stated that it limited TDF offerings to a single tenor to streamline its 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 off through the term deposit facility. — Katherine K. Chan