The Bangko Sentral ng Pilipinas may further cut the interest rate on special deposit accounts (SDAs) as it hopes to reduce mounting pressures on the peso.
In a publication jointly issued by First Metro Investment Corp. (FMIC) and University of Asia and the Pacific, analysts said the central bank could cut the SDA rate again due to the adverse impact of a sharp and sudden rise of the peso.
After appreciating by nearly 7 percent in 2012, the peso recently strengthened further to the 40-to-a-dollar territory.
FMIC believes that the central bank has been intervening in the foreign exchange market to help prevent the peso from appreciating further. It expected the BSP to do more to prevent the local currency from appreciating too sharply.
Although a stronger peso has its benefits, it also has downside. For one, it reduces the value of dollar remittances sent in by overseas Filipino workers (OFWs). Also, it makes Philippine exports and wages of Filipino workers more expensive for foreign consumers and investors, respectively.
The 40:$1 exchange “was considered an undesirable level because it posted a great threat for exporters, OFWs, and the business process outsourcing industry, since it could lower their peso incomes while peso costs remain the same,” FMIC said in the February issue of “The Market Call.”
It said that contributions OFWs, exporters and BPO firms account for 80 percent of the economy.
The appreciation of the peso is attributed to rising dollar inflows, such as foreign portfolio investments. More foreign fund owners have been investing in peso-denominated securities because of the favorable outlook on the Philippine economy.
“As foreign portfolio capital inflows continue to pour into the economy, the BSP will most likely maintain key policy rates and possibly lower the SDA rate further to prevent further peso appreciation and slow down those [portfolio] inflows,” FMIC said.
Foreign funds are prohibited from being invested in SDAs, although these instruments are said to be attractive to foreign fund owners. But by cutting the interest rate, demand for SDAs will wane, the analysts explained.
Last month, the BSP cut the interest rates on SDAs to a uniform rate of 3.5 percent. Prior to the cut, the rates were set at premiums over the central bank’s key policy rate, which currently stands at 3.5 percent, depending on maturities.