The Philippine Banking System Has Too Much Money. That's the Problem.

The Bangko Sentral ng Pilipinas has raised interest rates three times this year — from 4.25% to 5% — in an attempt to bring inflation under control. At the same time, the government is effortlessly raising billions in treasury auctions, and bank deposits climbed to a record P22 trillion, up 9.8%.

Official language describes this as "ample liquidity" and "ample funding." It sounds like the system is healthy. But "ample funding" in this context is actually a plumbing problem, not a growth story. The banking system is sitting on cash with nowhere productive to put it, and that excess is distorting borrowing costs, enabling government spending, and hiding a weakness that rate hikes alone can't fix.

How you get a liquidity surplus while raising rates

The sequence that created this situation ran like this:

Household and corporate deposits surged — nearly double the previous year's pace — as people and businesses saved more, partly from remittances and partly from precautionary behavior as inflation climbed. But loan demand didn't keep up. GDP growth slowed to 2.8% in the first quarter and then to 2.3% in the second quarter, the weakest expansion in years. Gross capital formation — the investment measure — contracted sharply alongside it.

So deposits poured in while lending stalled. The result: excess money sitting in the banking system.

The central bank responds by mopping up the surplus. Through its monetary operations and Term Deposit Facility, the BSP has absorbed well over a trillion pesos of excess money supply from the market. The TDF continues to attract strong demand — tenders consistently exceeded the P140 billion offered — meaning banks are actively competing to park their idle money at the central bank.

This is unusual plumbing. Most central banks with excess liquidity use open-market sales of their own securities. The BSP, constrained by its framework, relies on TDF auctions and BSP securities — short-term bills auctioned to dealers. BSP Securities serve as the primary monetary instruments for liquidity management.

The government benefits. That's the twist.

All this idle bank cash has a natural destination: government debt. The Bureau of the Treasury has been raising funds easily. A recent treasury bill auction pulled in billions, driven by strong demand for short-term debt from institutions sitting on deposits. The government completed a $2.5 billion triple-tranche global bond offering in June, and its 10-year bond yield fell to around 7.36% in early August from a peak of 7.58%.

For the government, ample liquidity means cheap, reliable funding even while the central bank tightens. The treasury doesn't need to offer attractive yields because banks are searching for short-duration, safe assets to absorb their deposit surplus. It's the same mechanism that makes sovereign borrowing easy in any economy where deposits grow faster than credit — except in the Philippines, the gap is unusually wide.

This creates a misalignment the BSP can't fully control. The central bank raises its policy rate to cool the economy, but the government's funding costs don't rise proportionally because the liquidity surplus keeps demand strong. The treasury gets the benefit of easy money while the central bank does the work of tightening. The fiscal picture requires World Bank-style resilience support to navigate.

Rate hikes are fighting the wrong inflation

The BSP's three rate hikes this year were aimed at inflation running above the 2%-4% target band. But the drivers aren't what monetary policy fixes.

Oil prices stayed elevated through a Middle East conflict that pushed the peso to a record low earlier in the year and back toward 61.70 by mid-July. The Philippines imports most of its energy, so higher oil directly translates to higher fuel, transport, and food costs. The BSP flagged a looming El Niño threatening crop prices alongside persistently high oil. These are supply shocks.

Raising the policy rate doesn't lower the price of imported oil. It doesn't prevent El Niño. And it doesn't fix a currency that's weakening because of the same external pressures the rate hike was supposed to address. The BSP itself acknowledged that raising rates would delay the recovery and that inflation was supply-driven.

What this means for the money

The plumbing has three consequences that matter:

Banks earn spreads but face credit risk. Record deposit growth and elevated short-term rates mean banks are earning comfortable net interest margins — deposit growth and rate pass-through through 2026 support margins — but the underlying economy isn't generating enough quality borrowers. Phibor rates and lending indicators show the cost of funds remains elevated. If banks lend more to soak up deposits, that lending may not be to the strongest credits. The margin looks good until it doesn't.

The government's debt burden is temporarily hidden. Easy access to short-term funding at modest yields makes the fiscal position look manageable. But the government already completed $2.5 billion in external commercial borrowing for 2026. If liquidity tightens — through deposit outflows, peso weakness, or a global rate cycle — the treasury's funding costs will adjust upward quickly.

The peso is the weak link. The currency has fallen from below 60 to roughly 62 per dollar as of September. The fundamental issue — heavy energy imports and slowing growth — hasn't changed. A weaker peso makes imported inflation worse, which pushes the BSP to keep rates higher, which slows growth further, which weakens the peso more. The feedback loop is real and it's the one variable that connects all the others.

The real constraint

What to watch isn't the headline "ample funding" — it's the gap between where the money is and where it's not. It's in the banking system, in government bonds, and in short-term deposits. It's not in investment, consumption, or growth.

The BSP projects average inflation will breach the 4% ceiling through 2027. GDP grew just 2.3% in the second quarter. The central bank has absorbed well over a trillion pesos in excess liquidity and likely has more to go. And the government needs to fund a massive budget without a growth story to underwrite it.

Ample funding sounds like strength. But when the money isn't moving through the economy — when it's just sitting in banks, getting absorbed by the central bank, and recycling into government paper — it's not strength. It's a system waiting for something to change.