BSP cuts SDA rate again to keep peso in check


Posted at Apr 25 2013 04:04 PM | Updated as of Apr 26 2013 01:10 AM

MANILA (UPDATE) - The Philippine central bank as expected left its benchmark interest rate on hold at a record low on Thursday while cutting the rate on its special deposit account by 50 basis points to boost economic activity and contain the peso's strength.

The Bangko Sentral ng Pilipinas (BSP) has left the overnight borrowing rate unchanged at a record low of 3.5 percent since December 2012 on expectations the economy will remain robust this year.

All 12 economists in a Reuters poll this week had forecast the overnight borrowing rate would be kept steady, and most of them had predicted the SDA rate cut.

"The monetary board noted that the benign inflation environment and robust domestic growth prospects provided scope for further enhancing efficiency of the operations for absorbing liquidity through the special deposit account (SDA) facility," BSP Acting Governor Nestor Espenilla said.

The central bank lowered the SDA rate to 2.0 percent across all tenors effective immediately, bringing to more than 200 basis points the total rate cuts since July 2012. It uses the facility to manage market liquidity but the size of the deposits parked there has strained its finances. 

"This rather aggressive stance ... reflects the central bank's desire to lower costs as well as spur spending. The 1.9 trillion pesos deposited in the SDA facility weighs on the BSP's balance sheet while not being channelled into more productive investment," said Trinh Nguyen, an economist with HSBC in Hong Kong.

Some analysts expect another cut in the SDA rate by the end of the third quarter.

"We see scope for a last cut of 25 bps, but that will depend on data on capital flows between now and the next meeting. In the meantime, the BSP will assess the cumulative impact of recent measures, including the SDA rate cuts and the FX liberalisation measures," said Jeff Ng, economist at Standard Chartered Bank. 

The cut follows the central bank's move last week to liberalise rules on foreign currency transactions, part of a series of measures it has put in place to curb sharp currency swings. 

The impact of the cuts, however, has yet to be felt with money parked with the SDA window at P1.93 trillion ($46.7 billion) in the week ending April 5, just slightly down from a record P1.95 trillion in the week ending March 15.

"We need to continue enhancing and improving the efficiency of our credit operations involving the SDA, BSP Deputy Governor Diwa Guinigundo said.

Dominic Bunning of HSBC said the SDA cut will not have a major impact on the peso as it was well flagged in the market.

"If anything, lower SDA rates in general could push more money into bonds and equities and actually, at the margin, encourage more inflows to those markets," Bunning said.

"The BSP is clearly looking to limit those inflows it sees as speculative in nature and balance inflows by increasing outflow channels, but given the economy's relatively robust fundamentals we still think inflows will continue and the peso should have further upside," he said. 

Bank lending has grown at a consistent double-digit rate since 2011, but Assistant Governor Cyd Amador has said there is still room for lending to grow as the loan-to-deposit ratio remains low. 


The peso firmed slightly to 41.23 to the dollar after the announcement from 41.29 earlier.

After a gain of nearly 7 percent in 2012, it has lost around 0.6 percent so far this year, and some market watchers believe those losses could soon deepen after the cut in the yields on peso deposits.

The BSP has spent billions of pesos to keep the local currency from appreciating too quickly to cushion the impact of a strong currency on exports, foreign exchange remittances and revenues of the outsourcing sector, all key drivers of economic growth. 

With inflation expected to remain benign this year, analysts in a Reuters quarterly poll nudged their expectations for the first interest rate hike into the first quarter of 2014 from the fourth quarter of 2013 in a similar poll in January.

The average on-year inflation rate in the first two months of this year was 3.2 percent, near the bottom of the central bank's 3 to 5 target bank for the full year, providing the central bank sufficient policy headroom. 

Economic Planning Secretary Arsenio Balisacan has said the economy likely grew between 6 to 7 percent in the first quarter but some analysts have said that may be too optimistic after exports saw their steepest drop in 14 months in February, due to weak global demand for electronics and a strong peso.