Mar 142013

MANILA, Philippines – Monetary officials slashed on Thursday the special deposit account (SDA) rate to 2.5 percent in a bid to push out idle funds to help fund economic activity and boost growth amid a low inflation environment.

Policy rates were also kept steady at record-lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending, the Bangko Sentral ng Pilipinas (BSP) said.

The rate of the SDA— deposits of banks and trust departments with the BSP— was cut by 50 basis points from three percent. This was the second cut made for the year, following a similar reduction in January.

“The Monetary Board’s decision to maintain the policy interest rates at their current levels is based on its assessment that the inflation environment over the policy horizon is likely to remain manageable,” BSP Governor Amando Tetangco, Jr. told reporters.

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Inflation is seen to average 3.3 percent for 2013 and 2014, slightly faster than the January forecasts of three percent and 3.2 percent, respectively. Both are still within the low-end of the official 3-5 percent target range.

“The revisions (to forecasts) were because of the higher actual outturn for the January inflation,” BSP Assistant Governor Ma. Cyd Tuaño-Amador said in a briefing.

Inflation accelerated to 3.4 percent in February from 3 percent in January. This put the average so far to 3.2 percent. Amador said with prices under control, BSP could allow more liquidity to flow out of the system through an SDA rate cut.

With lower yield, the expectation is for banks to use idle money— totaling about P1.8 trillion— “to fund productive activities” and help deepen capital markets and spur growth in the process, Amador explained.

The country is also safe from any asset bubble formation, usually a product of excessive money circulating in the economy.

“We believe pushing out (the money) was not an irresponsible act because the economy could absorb the funds,” she said.

In addition, funds being released to the system would also address BSP’s ballooning losses as this would reduce interest payments by roughly P20 billion in the next 12 months.

Based on its latest income statement, the central bank incurred losses amounting to P86.31 billion as of November, the widest since the institution was established in 1993. The old central bank was folded due also huge debts.

“We need to emphasize that the movements (and) calibrations in the policy settings are not driven by the bottomline issues. It’s just residual issues for the central bank,” Amador explained.

“There’s space to (cut SDA rate), given the favorable dynamics. It was done only because inflation and growth dynamics allow,” she added.

Moving forward, the BSP said it will continue to monitor developments to see if there is need to tweak policy rates and “employ macroprudential measures” to address huge inflows.

Amador agreed, saying: “We think that this (cut) is manageable and that we have a wide range of instruments in order to forestall asset imbalances.”

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