Philippines Reduces Payment on Special Deposits as Peso Climbs

The Philippines cut the rate it pays on special deposit accounts for a second time this year as it steps up efforts to curb inflows and restrain currency gains, while keeping the benchmark borrowing cost unchanged.

Bangko Sentral ng Pilipinas cut the rate on all SDAs to 2.5 percent effective immediately, according to a statement in Manila today. It kept the rate it pays lenders for overnight deposits at a record-low 3.5 percent, as predicted by all 16 economists surveyed by Bloomberg News.

Governor Amando Tetangco, who has imposed limits on lenders’ currency forward positions and expanded monitoring of real estate loans to curb inflows, said this week the central bank is moving to an interest-rate corridor approach in policy making. Capital volatility poses a risk for Asia-Pacific economies, Standard & Poor’s said last week, raising the potential for asset and credit bubbles 15 years after the 1997-98 financial crisis.

“The SDA rate cut shows that the central bank continues to work on the implementation of the interest-rate corridor mechanism to battle against surging capital inflows,” said Emilio Neri, an economist at Bank of the Philippine Islands in Manila. “Bangko Sentral can lower SDA rates to as low as 1.5 percent before year-end without necessarily stoking inflation.”

The peso closed down 0.1 percent at 40.625 per dollar before the announcement. It is the best performer in the past year among 25 emerging-market currencies tracked by Bloomberg. The yield on 5.875 percent bonds due March 2032 fell three basis points, or 0.03 percentage point, to a one-year low after the decision, according to Tradition Financial Services.

Portfolio Inflows

Philippine President Benigno Aquino is increasing spending to a record this year while seeking more than $17 billion of investments in highways and airports to spur growth to as much as 7 percent. Standard & Poor’s in December raised the nation’s sovereign rating outlook to positive on improved governance and public finances, bringing it closer to investment-grade status.

The $225 billion economy grew 6.8 percent last quarter from a year earlier, beating expansions in Indonesia, Malaysia and India. Net portfolio inflows were almost six times higher in January compared to December, spurred by funds including Manulife Asset Management and Western Asset Management Co. The Philippine Stock Exchange Index has advanced 15 percent this year, the biggest gain among major emerging Asian nations.

Policy makers in the Asia-Pacific region have warned about the danger of rising currencies. New Zealand Governor Graeme Wheeler held borrowing costs today and said they may reduce the benchmark if the local dollar rises more than the economy justifies. South Korea also held its policy rate today.

Rising Liquidity

Bangko Sentral is ready to employ measures to avert asset bubbles, Governor Tetangco said today. The monetary authority will continue to review all its tools as it takes into account the rising liquidity, Assistant Governor Cyd Amador said, adding that she can’t say if the BSP is done with SDA-rate reductions.

The peso’s level reflects the fundamentals, Amador said. The SDA-rate cut to 2.5 percent from 3 percent will yield about 10 billion pesos ($246 million) in additional annual savings, she said. Bangko Sentral also unified the rate on its reverse repurchase facility to 3.5 percent, cutting the two-week and one-month rates from 3.5625 percent and 3.625 percent.

There were 1.86 trillion pesos of funds in SDAs and 276.9 billion pesos in the reverse repurchase facility as of Feb. 22, according to BSP data.

The central bank today raised its inflation forecast for this year to 3.3 percent from 3 percent and said it expects price gains to average 3.3 percent next year, too. Consumer prices rose 3.4 percent in February from a year earlier.

Philippine exports unexpectedly fell in January, the first decline in five months. Remittances, which make up about 10 percent of the economy, increased 6.3 percent in 2012.

“A further reduction of the SDA rate is still possible,” said Eugenia Victorino, a Singapore-based economist at Australia & New Zealand Banking Group Ltd. “To curb excess liquidity, the central bank is ready to refine existing macro prudential measures,” she said, adding that the monetary authority may officially adopt an interest-rate corridor approach.

Max Estayo in Manila at

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