The Bangko Sentral ng Pilipinas may soon ban foreign funds from being invested in its overnight borrowing facility—a move seen to address risks of the country attracting even bigger volumes of speculative capital from abroad.
Prohibiting foreign funds from being parked in the reverse repurchase (RRP) facility of the central bank is seen to complement the standing rule against the investment of foreign funds in special deposit accounts (SDAs) in the BSP.
According to economist Felipe Medalla, who sits in the policy-making Monetary Board of the central bank, the growing liquidity in the domestic economy necessitated appropriate policies that would help ensure inflation would be contained within manageable levels.
Therefore, he said that making sure that the BSP’s facilities did not attract foreign funds, which could cause a further buildup in domestic liquidity, was in the agenda of monetary officials.
Last week, the BSP further cut the interest rate on SDAs to 2.5 percent. This followed the move in January to slash the interest rates on SDAs to a uniform 3 percent (previous rates were set above 3.5 percent at varying margins depending on maturity).
The cut in the SDA rate is expected to further discourage the placement of foreign funds in SDAs. Despite the prohibition, there was suspicion some foreign funds were still being invested in SDAs.
But with the SDA rate now much lower than the central bank’s RRP or overnight borrowing rate, which stands at 3.5 percent, Medalla said there was a probability that some funds from the SDAs might simply shift to RRPs.
He said that given the objective of keeping inflation modest, the BSP would be willing to accommodate more deposits in its RRP facility should domestic liquidity grow.
In particular, he said the BSP might avail itself of more government securities to increase its capacity to accommodate deposits through the RRP facility (under the central bank’s charter, the amount of deposits it can accept from banks through the RRP facility is limited by its holdings of government securities, which serve as collateral).
However, he said it was not the job of the BSP to accommodate foreign funds.
“If the RRP would be attracting foreign money, then that would defeat the purpose [of tempering liquidity growth in the domestic economy],” Medalla yesterday said at the sidelines of the launch of the “Asian Bond Monitor,” a quarterly publication of the Asian Development Bank. “We [BSP] don’t want to mop up excess global liquidity.”
Medalla said the BSP was prepared to act in case it saw signs of a significant growth in liquidity. In particular, he said, the BSP was willing to make the RRP facility play a bigger role in sterilizing excess funds circulating in the economy by accommodating more deposits if necessary.
“So far, that is not happening. But if we see that there is too much liquidity growth, then the RRP should have a bigger role as a major tool [to counter inflationary pressures],” he said.