Barclays bets PHL policy rates, SDA yield to stay unchanged in 2013

Global banking giant Barclays sees the Bangko Sentral ng Pilipinas refraining from tweaking policy rates and yields of the central bank's special deposit accounts (SDA) for the rest of the year.

“We are now changing our call to no further cuts in SDA rates, having previously forecast an additional 50 basis points reduction,” Prakriti Sofat, Singapore-based economist at Barclays, said in an e-mailed note after the Monetary Board's announcement Thursday.

Sofat noted that monetary officials are in a wait-and-see mode on effects of moves limiting placements in SDAs—a tool to mop up excess liquidity.

Citing recent pronouncements from central bank officials, she said the Monetary Board appears “to have explicitly ruled out a further reduction in the near term, with the BSP preferring to wait for the impact of earlier cuts to filter through.”

Bangko Sentral slashed the rate on SDAs three times earlier this year to 2 percent, after banning foreign funds from the facility in 2012.

Last May, the central bank told bankers to gradually unwind investment management activities (IMA), a type of account in banks’ trust arms, from the SDA starting July prior to a total ban by 2014.

The moves were done to flush funds into more productive uses for the economy.

On Thursday, the policy-setting Monetary Board kept SDA settings unchanged.

Policy rates—the benchmark for bank loans—were also untouched at record lows of 3.5 percent for overnight lending and 5.5 percent for overnight borrowing.

Last week, Bangko Sentral Deputy Governor Nestor Espenilla said the regulator observed that funds withdrawn from SDAs were put into bank deposits, which could be made available for lending and financing activities.

“While increased credit growth from the earlier SDA rate cuts could lead to upward pressure on asset prices, we would expect this to be dealt with via macroprudential measures rather than monetary policy, reflecting the approach taken by other central banks in the region,” Sofat said.

While stating that policy rates remain “appropriate,” Bank of the Philippine Islands Emilio Neri Jr. still thinks another 50 basis points reduction in SDA rates may be employed before the year ends.

“BPI-Research maintains the view that the BSP may still be compelled to lower the SDA rate within the year to 1.50 percent allowing monetary authority leeway to deal with potential surges in portfolio inflows and bringing the interest rate corridor into full-symmetry,” Neri said.

The interest rate corridor will allow the central bank to adjust the floor and ceiling for rates on long- and short-term funds, and tweak the range to better manage liquidity based on what the economy needs.

Plans to employ the corridor mechanism was unveiled last February. Central bank officials said overnight lending rate could serve as the ceiling and SDA yields as the floor.


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