Government may start policy tightening with SDA rate

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The Bangko Sentral ng Pilipinas (BSP) is expected to adjust the interest rate of its special deposit account (SDA) to contain rising liquidity in a move that some analysts believe could “kick off” a sequence of rate tightening actions.

However, the BSP is not expected to increase its key policy rates this early given still manageable inflation and the continued growth of the economy.

Justino Calaycay, Accord Capital Equities Corp analyst, said that the current policy stance remains appropriate and in line with the BSP’s twin goals of spurring growth while keeping a rein on inflation.

Since October 2012, the BSP has kept its interest rates for overnight borrowing and overnight lending at 3.5 percent and 5.5 percent, respectively.


The central bank is set to review its policy stance in a meeting set on March 27.

“Based on the fourth-quarter performance, we don’t seem to have much problem on the growth side.

Generally, slower growth may necessitate a rate cut to pull business costs lower and encourage investments.

But a 6.5-percent growth given Yolanda’s devastation and impact is still pretty decent,” he said.

However, Calaycay said first-quarter economic growth will be the “litmus test” for the central bank.

“If it continues to be along average lines, say 6 percent above, there is no cause for alarm [that]the BSP may touch the rates.

In fact, if it falls below that, all the more that the BSP will be constrained to keep it steady,” he said.

While some concerns have emerged about inflation in the first two months averaging somewhere in the middle of the target band, the analyst said it provides “very little” motivation to change the current environment.

He said a third factor that could “force” the hands of the regulators to kick rates higher would be the peso’s depreciation against the US dollar, particularly if it continues and moves past the P45-P46 per dollar level.

“That may necessitate a slight tweak, if only to keep local interest rates competitive and stem a possible outflow beyond corporate and government requirements.

But then again, our record-level gross international reserves position serves as a good buffer,” he said.

Meanwhile, Jun Trinidad, economist at Citi Philippines, said in a research note the central bank may hike the interest rate for its SDA by 25 basis points, as the policy makers’ bias would be directed at prioritizing the SDA rate in their initial tightening move while leaving the overnight rate unchanged.

In 2013, the BSP cut SDA rates by a total of 150 basis points to 2 percent, while the reserve requirement ratio, which stands at 18 percent, has been unchanged since February 2012.

The SDA is a monetary facility that was made available to banks which the BSP uses to manage excess domestic liquidity in the financial system, while the reserve requirement ratio refers to how much of banks’ current deposits must be keep with the central bank.

“[A] key driver would be excess liquidity, in which broad-money growth exceeding 30 percent over the past seven months hasn’t wavered,” Trinidad said.

The BSP earlier reported that domestic liquidity, or M3, increased by 38.6 percent year-on-year at end-January 2014 to reach P6.9 trillion, faster than the 32.7-percent expansion recorded in December 2013.

Trinidad said that one-offs like peso bond maturities, alongside recurring conversion of remittances, would compound excess liquidity, adding that excess money supply can aggravate the inflation trajectory, which was above 4 percent over the past three months.

“Excess liquidity reinforces the rate differential handicap of Philippine peso as it resumes weakness against the US dollar following the recent Federal Open Market Committee meeting. Robust money supply growth isn’t required by a growth outlook that’s already upbeat,” he said.

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