BSP trims short-term SDA rates, but policy rate cut unlikely

Posted at 07/13/12 1:51 PM

MANILA (UPDATE) - The Philippine central bank on Friday slightly lowered the interest rate it pays on banks' placements in its short-term special deposit account (SDA) window, but authorities are not expected to immediately follow through with a policy rate cut.

The latest move, which follows tighter rules on SDAs approved last week aimed at tackling speculation that could add to currency volatility, signals that monetary authorities could be warming to cutting policy rates to a new low. 

"It seems more of a statement rather than giving a meaningful impact ... that there is room for rates to come down," said Vittorio Gomez, fund manager at Rizal Commercial Banking Corp (RCBC) in Manila. "There's no immediate need to do it right now."

The Bangko Sentral ng Pilipinas (BSP) cut by 3.125 basis points the rates on its one- and two-week and one-month SDA window.

It now pays 4.03125 percent for the 7-day instrument, the shortest tenor, still higher than the benchmark overnight borrowing rate that's at a record low 4.0 percent.

"The adjustment in the SDA rates is to fine-tune the pricing of the product, and is consistent with the decline in term global interest rates," Amando Tetangco, BSP governor, said in a text message to reporters.


The short-term facility, introduced by the central bank in 1998 to help manage liquidity in the financial system, has attracted funds amounting to as much as 1.7 trillion pesos ($40 billion) as it offers higher rates than comparable Treasury bills.

The longest SDA tenor of 31 days pays 4.15625 percent interest against the one-month T-bill which was quoted at 2.275 percent in the secondary market  .

With the dim outlook for the country's exports on expectations of slower external demand in the coming months, the central bank may seek to boost domestic growth, some analysts said.

"Despite the surprisingly strong export numbers for April and May, external demand may not be sustained in the coming months," said Eugene Leow, economist at DBS in Singapore.

"I am keeping to my view of no rate cut for now, but will not be surprised if BSP acts pre-emptively as the inflation outlook is benign and there is leeway for further monetary easing," he said.

Gomez of RCBC also said the cut in SDA rates allows the central bank room to protect its balance sheet.

The central bank incurred net losses of P33.7 billion and P59 billion in 2011 and 2010, respectively, partly on the weight of heavy SDA placements by banks.