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Financial IQ Philippines Quick Hit(s):
SDA rate down to 1.5%... too low. If you are still invested on SDA... you are losing money to inflation. Start considering other investment products such as preferred shares if you prefer fixed interest.
After cutting the rate on special deposit accounts (SDAs) by a total of 150 basis points, the Bangko Sentral ng Pilipinas is not likely done with the current monetary easing cycle, a Bank of the Philippine Islands economic research said.
Contrary to recent speculations on the phaseout of the SDA—the mechanism by which the central bank borrows from a broader market—this facility will likely remain in operation until the BSP “can find a suitable replacement to mop up liquidity to effectively carry out its primary mandate to ensure price stability,” said the research note written by Nicholas Antonio Mapa.
However, the BPI research expected further reductions in the SDA rate, possibly down to 1.5 percent by year’s end, noting that “inflation will be well-anchored and remain at the low-end of the inflation target.”
The research was issued after the BSP slashed further the SDA rare by 50 basis points to 2 percent during the monetary setting last Thursday.
Keeping the SDA facility was seen in line with the BSP’s objective to institutionalize an interest rate corridor, the BPI research said. Under the interest rate corridor system, the central bank will set minimum and maximum rates on long- and short-term funds and adjust the rates in response to how much liquidity is required by the economy. Such a system helps the central bank maintain rates at levels consistent with its desired monetary policy stance while curbing short-term interest rate volatility. The SDA rate is seen providing the minimum rate to this corridor and the overnight borrowing indicating the maximum rate.
The BSP introduced the SDA facility in late 2008 to expand its mopping-up capability as the overnight borrowing rate alone was not enough to siphon off excess liquidity in the local financial system. This facility, which is accessible even to retail investors through the trust departments of banks, now locks up close to P2 trillion in excess funds.
Last week’s SDA rate cut marked the third reduction in the rate on this facility and the total 150-point cumulative cut was bigger than the 100-point reduction in the overnight borrowing rates. The BSP has kept its overnight borrowing rate unchanged at 3.5 percent.
“Given the benign inflation environment and falling oil prices, monetary authorities were afforded more scope to cut interest rates further and channel more funds to productive lending,” the BPI research said.
The BSP has tempered its inflation forecast for this year to 3.2 percent from 3.3 percent. In March, the inflation rate stood at 3.2 percent.
“Previous cuts to the SDA rate have had limited effect in the past as the amount of funds parked in the facility have yet to decrease despite lower interest rates,” the research said. “Despite efforts for the BSP to channel funds to productive sectors, investments have yet to pick up substantially and the most recent cut may entice some funds to finally shift out of the facility.”
The BSP research said the BSP might choose to unveil more innovative measures to induce funds to shift away from the SDA facility, perhaps through further amendments of rules regarding participation in the fund.
On the likely market impact, the BPI research said the latest SDA rate cut might have limited immediate effect on the local government securities market as most market players have priced in the most recent move at least a week ahead of the actual monetary setting.
http://business.inquirer.net/119153/rate-on-sdas-seen-declining-to-1-5
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