Bangko Sentral cuts SDA rates to 2%, but keeps policy rates unchanged

(Updated 6:34 p.m.) The Monetary Board on Thursday slashed the yield of special deposit accounts (SDAs) for the third time this year, but left the benchmark interest rates steady at all-time lows. In a press conference, BSP Deputy Governor Diwa Guinigundo said monetary authorities decided to keep policy rates—which serve as benchmarks for interest on bank loans—untouched at record lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending. The Monetary Board, however, cut SDA rates by 50 basis points to 2 percent, effective immediately. Last March, the Bangko Sentral's Monetary Board also lowered the SDA rate by 50 basis points to 2.5 percent. The move came less than three months after the SDA rates were rationalized from a premium over policy rate to a uniform 3 percent. The Bangko Sentral created the SDA window primarily to mop up excess liquidity, allowing banks to park unused funds at better rates than Treasury bills. The moves were in line with expectations of 11 economists and analysts polled by GMA News online earlier in the week. “The Monetary Board’s decision to maintain the policy rates at their current levels is based on its assessment that the inflation environment is likely to remain manageable over the policy horizon, with expectations firmly anchored within the inflation target band,” said Guinigundo. Guinigundo said monetary authorities firmly believe that inflation this year will settle at the lower end of Bangko Sentral’s 3 to 5 percent target. “The adjustment [in the SDA rates] is in line with the BSP’s continuing efforts to fine-tune its monetary policy instruments and thereby gain greater flexibility in conducting monetary operations, and also ensure adequate liquidity for economic activity,” he noted. Analysts have pointed out that another cut in SDA rates will help the central bank implement an interest rate corridor as a monetary tool. “Although the BSP has not really discussed specifics of its interest rate corridor plan, the cut in SDA rates is consistent with the central bank’s intent for that mechanism, as the window between SDA rates and overnight lending rate is now wider,” said Security Bank economist Patrick Ella. The interest rate corridor mechanism is a tool that allows the central bank to set the floor and ceiling for rates on long- and short-term funds, and tweak the range for better liquidity management based on what the economy needs. After the central bank streamlined the SDA rates, Bangko Sentral Governor Amando Tetangco Jr. in February unveiled the plan to adopt the interest rate corridor approach to managing liquidity. — BM/VS, GMA News