The Bangko Sentral ng Pilipinas’ recent decision to end its monetary easing cycle is seen reflective of growing concerns on the volatility of asset markets, British banking giant HSBC said.
“For the time being, the central bank will likely employ a wait-and-see approach concerning the SDA (special deposit account) rate, especially with its operation costs lessened, thanks to a weakened Philippine peso and impending outflow of funds from the SDA facility,” HSBC economist Trinh Nguyen said in a recent research.
The SDA refers to a high-yielding deposit account facility through which the BSP is able to borrow from the broader market. Since the start of the year, the BSP has kept its overnight policy rates steady but slashed the SDA rate three times by a total of 150 basis points to a record-low 2 percent.
“The desire to slash the (SDA) rate to 1.5 percent remains but is likely suppressed for the time being given the urgency to do so has dissipated,” Nguyen said.
During its policy rate setting on Thursday, the BSP held its main policy rates on hold in line with expectations but kept the SDA rate steady against many analysts’ expectation of another 50-basis-point cut. HSBC was among those expecting a final cut by the BSP.
With the cuts sanctioned earlier in the year alongside the restriction placed on the SDA facility that is seen to cause an outflow of at least $20 billion, Nguyen said the BSP was likely satisfied with its policy decisions to bring down operational costs as well as the recent weakness of the peso.
“With inflationary pressures contained and external demand weak, the main policy rates are likely to stay steady for the rest of the year,” she said. “Given that the external environment is getting messier, the central bank will likely adopt a wait-and-see mode to monitor market movements.”
The economist pointed out that last year, the central bank recorded a loss of P95.4 billion, with more than half incurred through foreign exchange intervention.
However, Nguyen said the recent weakness of the peso meant that the BSP’s costs of sterilizing forex intervention through the foreign exchange swaps market have likely declined. Coupled with this, Nguyen said the recent restriction on the SDA facility to only unit investment trust funds for pooled funds meant that by end-November this year, the central bank would be able to force out about half of the facility, currently at about P1.9 trillion. Doris C. Dumlao