Funds in SDAs hit record high of P1.86T

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04:48 AM March 11th, 2013

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By: Michelle V. Remo, March 11th, 2013 04:48 AM

MANILA, Philippines—Funds parked in special deposit accounts (SDAs) at the central bank surged to an all-time high of P1.86 trillion in February even after a substantial cut in interest rate.

The Bangko Sentral ng Pilipinas (BSP) said the sustained increase was an indication of the excess liquidity in the economy, although it said a lag in the effect of the SDA rate cut on the amount of deposits was expected.

“The increase in SDAs is a sign of sustained inflow of foreign exchange to the economy,” BSP Governor Amando Tetangco Jr. told reporters Friday.

Data from the central bank showed that a month after interest rates on SDAs were slashed, placements in the deposit facility hit a record high of P1.86 trillion on Feb. 22. In January, the BSP reduced the interest rate on SDAs to a uniform rate of 3 percent. Previously, the rates were set above the overnight borrowing rate of 3.5 percent at varying margins depending on maturity.

The BSP said the rate cut, which is expected to significantly trim its interest expenses, was meant to align policies in the country with international best practices. In many advanced and emerging economies, officials said interest rates offered by central banks through their deposit facilities were lower than the key policy rates.

It said the rate cut was also intended to push capital-market players to create more financial products like derivatives that, in turn, could help deepen the country’s capital markets. Officials said that having more investment instruments would help distribute the excess liquidity in the economy and thus avoid asset price bubbles.

The BSP also encourages banks to use more of their liquidity for lending, particularly to support job-generating investments, while observing proper credit standards. Economists said the economy could grow even faster if banks would withdraw portions of their SDA funds and use the money for lending.

Victor Abola, an economist at the University of Asia and the Pacific, said in an interview that the cut in the SDA rate was a prudent move and that there was room for a further reduction in the SDA rate.

The increase in SDA funds was attributed partly to a rising liquidity in the banking sector, which is enjoying growing deposits from the public. The growth in deposits, in turn, is credited to growing remittances and incomes that allow households to save.

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