BPI sees further SDA rate cut this week

MANILA, Philippines - The Bank of the Philippine Islands (BPI) expects another cut on the rate of special deposit accounts (SDA) this week.

Interest offered on the SDA-parked funds by banks and trust departments with the central bank-- could be trimmed by another 50 basis points to 1.5 percent, BPI economists Emilio Neri Jr. and Nicholas Antonio Mapa said.

Record-low policy rates, meanwhile, may be maintained at 3.5 percent for overnight borrowing and 5.5 percent for overnight lending.

The Bangko Sentral ng Pilipinas (BSP) will hold its next policy meeting on Thursday.

“The BSP will decide to do this primarily to limit its losses stemming from sterilization costs,” the BPI economists said in a research note.

Since its inception in 1998, the SDA has attracted trillions of funds due to the higher rate it offers versus other safe investment instruments.

Interest payments amounting to P1.9 trillion of idle money have contributed to BSP’s losses that hit a record of P95.38 billion last year.

Aside from this, Neri and Mapa said the BSP would likely take advantage of the low inflation environment alongside the strong economic growth in the first quarter.

The country saw a 7.8 percent surge in its gross domestic product for the first quarter, surpassing market expectations. This was achieved against the backdrop of three percent inflation, which was the low-end of the BSP target.

“While we acknowledge that the BSP does not react to instantaneous inflation prints, we foresee upward consumer price pressures in the medium term to remain limited given the fragile state of the global economy,” the economists pointed out.

During its past three policy meetings, the BSP cut SDA rates by 50 basis points each to bring them down from 3.5 percent in a bid to boost economic activity and contain the peso’s strength.

Since then though, Neri and Mapa said loan growth have been slowing, thus making the 7.8 percent growth as of March “unlikely to cause any immediate overheating concerns.”

Overheating pertains to a scenario of very fast growth that results into skyrocketing inflation.

“Headline inflation has been way below the target range for two consecutive months,” the economists pointed out.

In addition, BSP lowering the SDA rate would put into “full symmetry” the interest rate corridor mechanism.

The central bank is planning to shift into an interest corridor, which involves the use of three interest rates: the deposit rate, which is the SDA (currently at two percent), the policy rate (3.5 percent) and lending rate (5.5 percent).

The corridor, BPI analysts said, will give the BSP “flexibility” to deal with “sharp swings” in capital flows.

“We note that any further macro-prudential measures will be well received by the markets as the BSP carries out its primary mandate,” Neri and Mapa said.