BSP maintains policy rates, cuts SDA yield

The Bangko Sentral ng Pilipinas on Thursday decided to keep its key policy rates steady, but slashed the interest rates on special deposit accounts to discourage dollar inflows that have been pushing up the peso to uncompetitive levels.

The interest rate on SDAs, placements in which are estimated at nearly P1.7 trillion, was slashed to just 3 percent across all maturities. Previously the SDA rates were set at a premium on top of the overnight borrowing rate.

The key policy rates were kept at 3.5 percent for overnight borrowing and 5.5 percent for overnight lending.

Low interest rates worldwide have prompted foreign investors to park their funds with the BSP’s special deposit accounts because of the attractive yields. The BSP, for its part, has had little choice but to accept these deposits to prevent the excess liquidity in the financial system from pushing up the local inflation.

BSP Governor Amando Tetangco Jr. said the Monetary Board kept the policy rates steady because the local economy was expected to post a robust growth over the short term without breaching the target cap for inflation.

The BSP also said that the move to cut the SDA rates is not intended as an economic stimulus.

According to Tetangco, it is simply meant to “fine-tune” the monetary tools of the BSP.

BSP Deputy Govenor Diwa Guinigundo explained that, even with the cut in the SDA rate, banks are not expected to pull out a significant amount from the special deposit accounts.

This is because the new rate of 3 percent is still higher compared with what they can earn from other fixed income instruments, he said.

Also, the cut in the SDA rate is not expected to boost liquidity circulating in the economy nor will it cause inflation to rise, Guinigundo added. It will, however, reduce interest expenses of the BSP.

“Given that the interest rate was reduced to 3 percent, this will provide [the BSP] with some savings,” Guinigundo said.

The latest income statement of the BSP showed that it incurred a net loss of P78 billion in the first 10 months of 2012 because of huge expenses on interest payments and dollar purchases.

At the moment, the BSP still sees the economy growing robustly over the short term, while inflation remains benign, Tetangco said.

Based on the latest estimates of the BSP, inflation may average at 3 percent this year and 3.2 percent next year. The government sees the economy growing by 6 to 7 percent this year.

But Tetangco said the BSP would continue to closely monitor developments in and out of the country, particularly those that affect domestic prices. He said the central bank is prepared to adjust policy settings if price pressures become more pronounced.

The Philippine economy is estimated to have grown by at least 6 percent last year to become one of the fastest-growing economies in Asia.