BSP expects P11-B savings after cut in SDA rates

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) could easily save P11 billion in interest payments this year after cutting special deposit account (SDA) rates last January, allowing some space for more intervention should peso appreciation persists.

More savings could be generated as the BSP is “not ruling out” another SDA rate cut when it meets today for the second policy-meeting for the year, Monetary Board member Felipe Medalla told reporters yesterday.

 â€œWe have many more tools in our toolkit. We are fine-tuning the way we finance our foreign exchange operations. With the cut, we can do a little bit more of participation in the foreign exchange market,” Medalla said.

SDAs are fixed-term deposits of banks and their trust departments with tenors of one week, two weeks and one month.

Originally, they offer interest according to the BSP’s overnight borrowing rate – at 3.5 percent currently – adding premium depending on maturity. But last Jan. 24, the central bank slashed them to three percent across-the-board and dropped the premium.

Ideally, banks should retrieve their money from the facility and lend them out. But since projects to finance remain missing, Medalla said funds totaling P1.8 trillion – two percent up from Jan. 24 – stayed on the SDA.

This, in effect, saved the central bank the trouble to control money supply that could be inflationary in the process. It also assists them in making sure the pesos they use to purchase dollars remain under watch.

The central bank “sterilizes” the pesos it produces to purchase dollars in the spot market by buying them back from the banks.

“And so we were right. We, of course, know that we will be hurt by a too rapid appreciation of the peso. But on the other hand, preventing the peso appreciation by printing money is not on the menu,” Medalla explained.  

“We are not going to sacrifice (price stability). We will be very very diligent, studious but we will not forget our responsibility to the country. Those are immovables,” he explained.

As of now though, inflation of both basic goods and assets remain in check and that there is “no indication” a bubble is forming.

Medalla said the long-term solution –both to excess liquidity and strong peso – would be for the government to provide more investment avenues where these funds could be channeled.

 â€œWe are confident that sooner or later the economy will develop the capacity to mobilize our savings. By then, the problem of the strong peso will solve itself,” he said.