BSP sees more funds flowing into capital markets

MANILA, Philippines—The Bangko Sentral ng Pilipinas said funds that may be pulled out from special deposit accounts (SDAs) following the cut in interest rates are expected to boost transactions in the capital markets and fuel more business activities.

The BSP said pushing out some of the funds from its SDA facility, where nearly P1.7 trillion in resources are parked, is deemed prudent at this time given the absence of significant threats to inflation.

“We did what we did on SDAs so that we can push funds from the BSP to various financial markets and business activities,” BSP Deputy Governor Diwa Guinigundo said in a text message.

“We did what we did to help further develop the capital markets and enable better fund matching. If funds remain with the BSP, we are effectively stifling the development and deepening of our capital markets,” he added.

On Thursday, the central bank’s Monetary Board decided to keep its key policy rates steady but slashed the interest rates on SDAs to just 3 percent across all maturities.

SDA rates were previously set at premiums over the 3.5-percent overnight borrowing rate of the BSP.

The move came amid rising deposits by banks to the SDA facility, which allowed them to earn risk-free yields that are higher compared with the yield on most fixed income assets.

The SDA facility is meant to siphon excess liquidity from the economy and avoid worrisome inflation.

Some economists believe, however, that not all of the P1.7 trillion sleeping in the SDA facility is excess liquidity.

They said some of the money must be used for more productive initiatives, such as lending to support job-generating investments.

The BSP shares the same view and said that funds withdrawn from SDAs may be used to boost transactions in the capital markets, which economists said have to develop further to meet the potential increase in the country’s funding requirements.

Guinigundo said some of the funds deposited in SDAs may be allowed to circulate in the economy without causing unmanageable inflation.

This is because inflation remains very moderate, and so any price pressures to result from the withdrawal of funds from SDAs are unlikely to cause a breaching of the inflation target.

“Of course, our own estimate is that whatever funds actually leave the SDA facility will have minimal inflationary impact,” Guinigundo said.

The BSP estimates inflation to average at 3 percent this year, the low end of the official target of 3 to 5 percent.

Guinigundo said the cut in the SDA rates also may help temper foreign-exchange inflows (foreign funds were believed to be invested in SDAs), curb the peso’s appreciation, and trim interest expenses of the BSP, which incurred a net loss of P78 billion in the first 10 months of 2012. He said, however, that cutting expenses and curbing foreign-exchange inflows were merely consequences of the SDA-rate reduction and were not the main objectives of the move.