SDA rate cut to 2%

Dispelling speculation that growing domestic liquidity could lead to asset price bubbles and overheat the economy, the Bangko Sentral ng Pilipinas is effectively pushing more money into the system by cutting the interest rate on special deposit accounts (SDAs) by another 50 basis points.

In its policy rate-setting meeting Thursday, the Monetary Board of the BSP decided to cut the SDA rate from 2.5 percent to a new historic low of 2 percent. At the same time, it kept its overnight borrowing—the key policy rate—at 3.5 percent and overnight lending at 5.5 percent.

This is the third time this year that the BSP slashed the SDA rate. The first was in January, followed by another reduction in March. Each of the two previous rate cuts was by 50 basis points.

While the rate reduction could push money out of the central bank’s SDA facility and circulate in the economy, it is also seen to help temper foreign-exchange inflows and prevent a steep appreciation of the peso as the lower yield makes SDAs less attractive to foreign portfolio investors.

The BSP has been mindful of any excessive appreciation in the value of the peso after the local currency’s significant appreciation last year elicited complaints from exporters.

BSP Deputy Governor Nestor Espenilla Jr. said in a briefing Thursday that the rate cut aligned monetary policy in the country with international standards wherein interest rates offered on deposit facilities were way lower than the key policy rates of central banks.

“The adjustment is in line with the BSP’s continuing efforts to fine-tune its monetary policy instruments,” Espenilla said.