Latest SDA cut to benefit economy – HSBC economist

MANILA, Philippines - The latest cut on special deposit account (SDA) rates would benefit the Bangko Sentral ng Pilipinas (BSP) and the entire economy, analysts said, forecasting another interest rate reduction in the future.

Interest charged on SDA— parked funds by banks and trust departments with the BSP— was slashed for the third time last Thursday, bringing it down 50 basis points to two percent. This followed similar actions in January and March.

“The central bank is hoping that the additional rate cut will incentivize Filipinos to channel their funds into more productive investments and stimulate the economy,” HSBC economist Trinh Nguyen said in a research note.

Previous cuts, she said, were not able to push out funds amounting to P1.929 trillion as of April 5 to the economy and with the BSP still comfortable with asset prices, the cut was seen warranted.

Nicholas Antonio Mapa, a member of the Bank of the Philippine Islands research team, said the decision would have “limited immediate effect” to the capital markets, but that going forward, it may provoke more inflows to the equity market.

The benchmark Philippine Stock Exchange index has hit 27 record-highs this year as inflows continued to flood the economy. The local bourse closed at 7,025.44, up 0.43 percent from the previous day.

The peso, on the other hand, may stay within the 41 to a dollar level as foreign funds find “less impressive” opportunity for speculative activities after the SDA rate was lowered, Mapa said.

The local unit has appreciated by 0.6 percent in the first quarter versus the greenback, according to central bank data. This has prompted the BSP to intervene by buying dollars as exporters and remittance receivers get lower dollar earnings when converted to peso.

“An added bonus to the recent move is possible savings of up to P28.5 billion in sterilization costs from the previous year,” Mapa pointed out. The BSP has been in the red for the past three years.

For his part, Nomura Singapore economist Euben Paracuelles said the fresh cut was made as the BSP take advantage of low inflation to move into a “policy corridor” mechanism, where the policy rate will be between the SDA and lending rates.

Inflation is seen to settle at 3.2 percent this year, slightly down from 3.3 percent unveiled by BSP last March. For 2014, consumer prices will likely rise 3.4 percent, up from 3.3 percent initially.

“The inflation outlook has been helped by the recent drop in commodity prices,” Paracuelles said.

Analysts said future cut on SDA rate is still possible, with Paracuelles forecasting another 50-basis-point reduction “at the next Monetary Board meeting” on June 13.

Mapa said SDA rates may stay at 1.5 percent throughout the year after another cut, but more macro-prudential measures to tame inflows may be forthcoming.

“The BSP may opt to unveil more innovative measures to induce funds to shift away from the SDA facility, perhaps in further amendments to rules regarding participation in the fund,” he said.