Bangko Sentral seen cutting SDA rate to 1%

The Bangko Sentral ng Pilipinas is expected to further slash the interest rate on special deposit accounts (SDAs) to as low as 1 percent to help ease the peso’s appreciation in the wake of the unabated inflow of foreign exchange.

This was according to Citi, which said in its latest research note that the BSP would be forced to implement more measures to curb the impact on the exchange rate of a growing global liquidity.

Portions of this liquidity, which resulted from stimulus measures implemented by advanced economies, are believed to be spilling over to emerging markets like the Philippines in the form of foreign portfolio investments. As a consequence, the peso and other emerging market currencies have been on the rise against the greenback.

Citi said the likely further depreciation of the Japanese yen, which could result from ongoing measures to develop the export sector being implemented by Japanese policymakers, was not expected to influence a weakening of the peso. This was consistent with the common view among economists that foreign exchange inflows would continue to make the peso stronger.

“If (the Japanese yen) weakness will not stand in the way of a strong peso, the BSP will be compelled to undertake macro prudential responses led by SDA rate cuts—likely down to the range of 1 to 2 percent,” Citi said in the research note authored by Jun Trinidad.

In January, the BSP cut the interest rates on SDAs to a uniform rate of 3 percent. Previously, the rates were set above 3.5 percent at varying margins depending on maturity.

This was followed by another rate cut earlier this month by 50 basis points to just 2.5 percent.

The rate cuts followed the significant appreciation of the peso and the mounting losses of the BSP as a result of the exchange-rate movement.

SDAs were deemed highly attractive compared with other risk-free instruments because the yields used to be higher than those obtained from investments in government securities or bank deposits. Given this backdrop, even foreigners were believed to be investing in SDAs, causing more dollar inflows and causing the peso to strengthen.

The peso last year appreciated by nearly 7 percent against the greenback, ending 2012 at 41.05:$1. The peso became the fourth-fastest appreciating currency among actively traded currencies last year.

The rise of the peso has elicited complaints from exporters, who claimed the strengthening of the local currency has made Philippine goods more expensive for foreign buyers and thus less competitive.

In response, the BSP has implemented several measures to temper the rise of the peso. These included the prohibition of foreign funds from being invested in SDAs and the consecutive cuts in the SDA rate.

But since appreciation pressures on the peso remained significant, Citi said there was room for a further reduction in the SDA rate.