Analysts see PHL authorities keeping policy rates, but lowering SDA yield

Philippine monetary officials are likely to keep key rates unchanged, but a further cut in the yield on the central bank's Special Deposit Account (SDA) is highly likely, according to analysts and economists, noting the plan to implement the so-called “interest rate corridor mechanism” will influence the Monetary Board in its policy meeting this week. A GMA News Online poll of 11 economists and analysts shows a consensus that the inter-agency Monetary Board will keep policy rates—the benchmark yield for bank loans—unchanged at record lows of 3.5 percent for overnight borrowing and 5.5 percent for overnight lending when it meets this Thursday. “We expect the BSP to keep the policy rate unchanged at 3.50 percent as inflation is expected to remain within the target band in 2013,” said Prakriti Sofat, Singapore-based economist at Barclays. Forecasting a stay in policy rates, Standard Chartered Bank economist in Singapore Jeff Ng said, “Inflation remains benign for now, and food inflation is likely to remain a secondary concern in Q2 and Q3.” Inflation slowed to 3.2 percent in March from 3.4 percent in February, bringing the average in the first three months to 3.2 percent or near the lower end of central bank's 3 to 5 percent target. SDA rates, however, will likely be cut by up to 50 basis points, taking rates across all maturities down to 2 percent, analysts said. The the Monetary Board rationalized the SDA rates to 3 percent last January and to 2.5 percent last March.  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. “While main policy rates are expected to stay on hold, the Philippine central bank is likely to cut the special deposit account rate further to 2.00 percent from 2.50 percent,” said Trinh Nguyen, Hong Kong-based economist at HongKong Shanghai Banking Corporation Ltd. Bank of the Philippine Islands economist Emilio Neri Jr. noted the low inflation environment is giving the central bank enough leeway to further cut the SDA rate. “Their (Monetary Board) medium-term plan is to put in place the corridor mechanism, and this requires further reduction on SDA rates right now,” he said. Security Bank economist Patrick Ella agreed. “The BSP really wants to implement the corridor. SDA cuts of at least 25 to 50 basis points is likely,” he said. The mechanism is another monetary 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. In March, the Monetary Board kept policy rates unchanged but slashed SDA rates by 50 basis points to 2.5 percent. Monetary authorities rationalized the SDA rates to 3.0 percent in January. Before this, SDA placements enjoyed various yields that reflect a premium over policy rates. 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. — VS, GMA News