Cut in SDA rate seen to be just a matter of time

BSP on guard against risks brought on by excessive inflows

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The Bangko Sentral ng Pilipinas on Thursday confirmed that a reduction in the interest rate on special deposit accounts (SDA) could be imminent because of the expected surge in the inflow of foreign “hot money” resulting from the upgrade in the country’s credit rating.

BSP Governor Amando Tetangco Jr. said the assignment of an investment grade to the Philippines would attract even more foreign portfolio investments, and that the regulator might have to cut the SDA rate to avoid excessive liquidity.

Because it is higher than the yield of short-term government securities, SDA remains highly attractive despite the two rate cuts done earlier this year.

“The BSP has not maxed out its traditional tools [to manage liquidity in the economy] yet. We continue to have scope to adjust the SDA rate and tweak its operations,” Tetangco said in an e-mail to the Inquirer.

According to the central bank, foreign portfolio investments are welcome, but the flow of excessive amounts may result in asset price bubbles and the peso’s steep appreciation.

The BSP actually prohibits foreign funds from being invested in SDAs, but the regulator believes that some foreign portfolio investors may still be parking their funds in the deposit facility. Further reduction in the SDA rate will discourage investors from depositing their funds in the facility.

Last January, the BSP cut the interest rates on SDAs to a uniform 3 percent. Previously, SDA rates were set at varying margins above the BSP’s key policy rate of 3.5 percent depending on maturity.

On March 14, the regulator undertook a 50-basis-point cut, setting the rate at 2.5 percent.

Latest data from the central bank showed that, as of March 8, the amount deposited in the SDA facility reached an all-time high of P1.93 trillion. This is despite the rate cut undertaken January.

It is yet to be seen whether the rate reduction on March 14 would cause a decline in the SDA deposits.

The BSP decided to reduce the rates earlier this year because of the peso’s steep rise. The peso rose by nearly 7 percent in 2012, and continues to appreciate this year.

Market players said the peso would have been even stronger were it not for measures implemented by the BSP.

Apart from tempering the peso’s rise, a cut in the SDA rate will reduce the central bank’s interest expenses and losses. Latest income statement of the BSP showed that it posted a net loss of about P86 billion in the first 11 months of 2012.

Officials said the reduction of the SDA rate would also be consistent with international best practices. They said that in many advanced and emerging economies, interest rates offered through deposit facilities of central banks were lower than the key policy rates.

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