Money supply soars to near 3-year high after SDA rate cut

MANILA, Philippines - Money supply grew on its fastest pace in nearly three years last March after the Bangko Sentral ng Pilipinas (BSP) reduced the interest it charges on special deposit accounts (SDA), freeing up more resources to the economy. 

Domestic liquidity (M3)— the broadest measure of liquidity in the financial system— expanded 11.4 percent to P5.053 trillion, faster than the 9.4 percent posted the previous month, the central bank reported on Tuesday.

This was the fastest on record since April 2010’s 12.4 percent. 

“The continued expansion in domestic liquidity during the month indicates sufficient liquidity to sustain the economy’s growth momentum amid the BSP’s efforts to support non-inflationary economic growth,” the BSP said in a statement.

Last March 14, the BSP slashed SDA rates by another 50 basis points, bringing it down to 2.5 percent, following a similar action in Jan. 24. SDA are fixed-term deposits by banks and their trust departments with the BSP. 

The cuts were made to push out parked money from the SDA and finance projects that would boost economic growth. BSP has also said that it wanted to develop the capital markets by allowing funds to find higher returns.

By end-March, SDA deposits went down to P1.906 trillion from P1.954 trillion hit last March 15, official figures showed. As of April 12 though, SDA placements hit a new record of P1.983 trillion.

“Lower SDA rates do incentivize commercial banks to shift their asset allocation. However rates are just one factor,” DBS Ltd. economist Eugene Leow said in an e-mail.

“Two things are critical to watch out for: an improvement in loan demand going forward and more products (being) introduced which will allow SDA funds to flow into,” he added.

In March, loans granted by big banks grew slower at 14.2 percent from 15 percent in February. Outstanding loans, net of BSP placements, now amounted to P3.217 trillion. 

Broken down, loans for production activities expanded 14.2 percent to P2.929 trillion, while consumer credit used for household needs went up 10.8 percent to P255.76 billion. 

Of the production loans, the biggest gainers were: financial intermediation (28.8 percent of the total), transportation, storage and communication (26.2 percent), real estate, renting and business services (25.2 percent), electricity, gas and water (15.4 percent) and wholesale and retail trade (10.4 percent).

“The sustained expansion in bank lending is in line with the robust growth prospects of the economy,” the BSP said.

Benjamin Diokno, senior economist at the University of the Philippines-Diliman, said “lack of investment opportunities” prevents banks to lend more and stop parking at the SDA.

“I expect further cuts in the SDA rates within the second quarter,” Diokno said in a text message.