American banking giant JP Morgan Chase expects the Bangko Sentral ng Pilipinas to make a final cut of 50 basis points on the yield on special deposit accounts (SDA) this year.
In a research note issued after last week’s June inflation report, JP Morgan economist Matt Hildebrandt said the cost of sterilization or mopping up of excess liquidity was still a concern for the local monetary authority, which was still moving toward an interest rate corridor regime.
Under the interest rate corridor system, the central bank will set minimum and maximum rates on long- and short-term funds and adjust the rates depending on how much liquidity is required to oil the economy.
Such a system helps the central bank maintain rates at levels consistent with its desired monetary stance while curbing short-term interest rate volatility.
The rate on SDA—the mechanism by which the BSP borrows from a broader market—is seen providing the minimum rate to this corridor while the overnight borrowing (reverse repurchase) rate, provides the maximum.
The JP Morgan economist thus said another 50-bp SDA rate cut—on top of the three 50-bp rate cuts this year, was still “likely, though the timing is uncertain.” This is seen leaving the SDA rate 200bp below and the overnight lending rate, 200bp above the overnight borrowing rate, which is currently at 3.5 percent.
“An SDA rate cut also helped to offset some of the modest rise in market yields over the last few months,” Hildebrandt said.
“Moreover, if strong economic growth and what are still very low interest rates in the Philippines by historical standards were to lead to greater property market froth, we would not rule out the possibility of a reserve requirement ratio hike, or implementation of macroprudential measures, which could include lower loan-to-value ratios, buyers’ or sellers’ stamp duties, or stricter financing rules, among other possibilities. Right now, neither is in our base case scenario,” he said.