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Philippines Cuts Special Deposit Account Rate to Curb Inflows

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Jan. 24 (Bloomberg) -- The Philippines refrained from cutting benchmark borrowing costs, opting instead to reduce the rate on special deposit accounts to curb capital inflows that threaten to create asset-price bubbles.

Bangko Sentral ng Pilipinas kept the rate it pays lenders for overnight deposits at a record-low 3.5 percent, according to a statement in Manila today. The decision was predicted by all 20 economists surveyed by Bloomberg News. The central bank also cut the rate on all special deposit accounts to 3 percent with immediate effect, to ensure “adequate” liquidity.

Emerging-market policy makers are grappling with capital inflows that threaten to destabilize their economies as interest rates near zero in developed nations draw investors seeking higher returns. Bangko Sentral last week said it is considering expanding reserve requirements on banks’ trust products, as the peso’s rise to a five-year high this month hurts exporters and erodes the value of remittances.

“The main motivation behind the SDA rate cut is to temper the peso’s further appreciation,” said Emilio Neri, an economist at Bank of the Philippine Islands in Manila. “It is a less aggressive easing move compared with a benchmark rate cut. It’s a measured move and in the central bank’s own estimate, it would probably be enough to achieve their goals of cutting costs and tempering the peso’s very rapid rise.”

The peso closed little changed at 40.627 against the dollar before the decision. It has gained more than 6 percent in the past 12 months, the best performer among Asia’s 11 most widely-traded currencies tracked by Bloomberg. The benchmark Philippine stock exchange index advanced 0.4 percent at the close.

Speculative Inflows

The $225 billion economy grew 7.1 percent in the third quarter, the fastest pace since 2010 and the most in Southeast Asia. Increased spending by a growing middle class on Ayala Land Inc.’s homes and Jollibee Food Corp.’s chicken meals is boosting company profits and helped stocks surge to a record this month.

The Philippine monetary authority is focused on containing speculative inflows and has participated in the currency market to restrain the peso, Governor Amando Tetangco said last week. Bangko Sentral last month said it will impose limits on currency forward positions at banks at 20 percent of capital for local lenders and 100 percent for foreign entities.

The SDA rate cuts will help ensure that liquidity remains adequate to meet the requirements of the economy amid “manageable liquidity growth and a benign inflation outlook,” the central bank said in a statement. Nearly 1.7 trillion pesos ($42 billion) are held in SDAs, compared with 278 billion pesos in overnight deposits, according to the monetary authority.

The cuts create a more transparent market and could “drive funds to the government securities market, rationalizing interest rates,” Deputy Governor Diwa Guinigundo said. The three tenors prior to the reduction were above 3.5 percent.

Outlook Upgraded

The Philippines joins emerging-market peers including Indonesia, Thailand and Brazil in holding rates at the start of the year after lowering borrowing costs by a total of 100 basis points in four meetings last year. Inflation will average 3 percent this year and 3.2 percent in 2014, Guinigundo said.

Philippine President Benigno Aquino is increasing spending to a record this year while seeking more than $16 billion of investments in roads and airports to spur growth to as much as 7 percent in 2013. Standard & Poor’s last month raised the country’s sovereign rating outlook to positive, bringing it closer to an investment grade-status.

Remittances to the Philippines, which account for about 10 percent of the economy, rose 7.6 percent in November, while portfolio inflows surged to a record $18.5 billion in 2012.

The peso’s gains are eroding competitiveness, the Business Processing Association of the Philippines said last month. Elsewhere in Asia, advances in the won prompted South Korea’s central bank to say in November it would tighten limits on currency forward positions at banks, while a Commerce Ministry official in Thailand said yesterday they are worried that the baht’s strength will affect exports.

“More macro-prudential measures will be introduced soon,” said Michael Wan, a Singapore-based economist at Credit Suisse Group AG. “While inflation is unlikely to be a major issue this year, keeping the policy rate too low for too long might result in overheating problems.”

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Max Estayo in Manila at mestayo@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang in Singapore at sphang@bloomberg.net

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