BSP seen keeping SDA, policy rates unchanged

Monetary authorities are expected to keep policy rates and special deposit account (SDA) rates unchanged on Thursday’s meeting in the wake of recent steps taken to stem speculative inflows.

In a new research note, the DBS Group said the Bangko Sentral ng Pilipinas was “likely to adopt a wait-and-see approach” as it continued to focus on managing inflows amid increasing investor confidence in the Philippine economy.

The financial service provider noted that this had been the BSP’s attitude in the past several quarters, which the upgrade of the country’s long-term foreign currency borrowings to investment grade by Fitch Ratings was expected to reinforce.

Fitch’s move “is likely to trigger further inflows over the medium term,” DBS said, noting further hints of the peso strengthening against the greenback and dampening BSP’s intervention efforts made last year.

Also, DBS noted that the BSP had so far cut its SDA rates by a total of 100 basis points in an attempt to deter speculative inflows.

Last week, the BSP further relaxed foreign exchange rules by doubling the allowed amount that Philippine residents could buy over the counter without documentation to $120,000.

“With these steps already taken, (the) BSP may want to assess the effects and hold off further SDA rate cuts,” DBS said. “We also expect no change in the overnight borrowing rate this week.”

Currently, the overnight borrowing rate is pegged at 3.5 percent while the overnight lending rate is 5.5 percent.

Last month, the Singapore-based bank said the SDA rate cuts might finally induce banks to go to other instruments like higher-yielding government bonds or loans to clients.

DBS said the rate cuts would help the BSP dampen inflows of speculative capital as well as reduce the cost of absorbing liquidity in the domestic market.

“At these levels (of SDA rates), we think commercial banks may be inclined to adjust their asset mix,” DBS said in March.

Amid low yields on other instruments like government securities, the SDA enables banks to earn a risk-free return by placing deposits with the BSP.

“However, with the current low rate of returns, SDA funds may instead be channeled to higher-yielding government bonds and also induce banks to provide more loans,” DBS said.

The bank said in previous notes that policy rates might not change until the fourth quarter when a 25-basis-point hike is expected.