Tetangco Keeps Option of Philippine Special Deposit Rate Cut

The Philippine central bank will keep the option of another cut in the rate it pays for funds in so-called special deposit accounts, Governor Amando Tetangco said three weeks before the next policy meeting. The peso fell.

“We can’t rule it out,” Tetangco said in an interview late yesterday in Bandar Seri Begawan, Brunei. “If there is room to reduce it further, then we will do that. But we will have to make the assessment that will underpin that decision, as we don’t pre-commit to a specific policy direction.”

Bangko Sentral ng Pilipinas has cut the SDA rate twice this year while holding its benchmark at a record-low 3.5 percent as the monetary authority shifts to an interest-rate corridor approach for greater flexibility. The central bank will probably relax rules on foreign-currency transactions this month to encourage outflows, Tetangco said, as loose monetary policies in advanced economies spur inflows to emerging markets.

“Deposits still continue to pick up” even after the last SDA-rate cut in March, said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “That’s going to be a strong reason for them to cut it further,” said Paracuelles, who expects a 50 basis-point cut at each of the next two policy meetings. Bangko Sentral is scheduled to meet on April 25.

The peso fell 0.1 percent to 40.905 per dollar as of 11:28 a.m. in Manila, according to Tullett Prebon Plc. It has advanced more than 4 percent in the past 12 months, the biggest gain after the Thai baht among 11 Asian currencies tracked by Bloomberg. The Philippine Stock Exchange Index rose 0.9 percent. It surged to a record last week after Fitch Ratings awarded the nation its first investment grade.

Liquidity Issues

Policy makers across Asia are battling the risk of asset-price bubbles from increased inflows. Emerging Asia stocks had $9.5 billion of inflows in the first quarter this year, according to Citigroup Inc., compared with $1.8 billion of inflows in the same period a year earlier.

Foreign portfolio inflows into the Philippines climbed to $2.1 billion in February, about 40 percent higher from a year earlier, after surging to a 10-year high in 2012. They are creating “issues with respect to liquidity, inflation and exchange-rate appreciation,” said Tetangco, who is attending a meeting of central bankers and finance officials of the Association of Southeast Asian Nations.

“It’s something that central banks need to cope with,” said Paracuelles. “They’ve started deploying some measures, but the effects of the inflows are probably manifesting much more. There is a case for them to keep looking at these measures.”

Limits Imposed

Bangko Sentral had earlier imposed limits on lenders’ currency forward positions, banned overseas funds from SDAs and expanded monitoring of banks’ real-estate exposure. Tetangco said last week officials are also considering prohibiting overseas funds from its reverse repurchase facility.

Philippine SDAs held about 1.95 trillion pesos ($48 billion) and the reverse repurchase facility had 280.8 billion pesos as of March 15, central bank data showed. Funds in SDAs climbed from 1.93 trillion pesos the week before the March 14 rate cut.

Bank lending for property and consumers will pick up because of the SDA-rate cuts, said James Lago, head of research at PCCI Securities Brokers Corp. in Manila, as shares of Philippine builders gained. Ayala Land Inc. climbed 2.6 percent.

Philippine President Benigno Aquino is increasing state spending to a record this year while seeking more than $17 billion of investment in airports and roads to spur growth to as much as 7 percent. The economy expanded 6.6 percent in 2012.

The central bank will review its balance-of-payments forecasts when it meets and will also probably raise its estimate for foreign direct investments this year as manufacturing companies expand, Tetangco said. The government expects investment pledges to exceed last year’s record $15.9 billion, Trade Secretary Gregory Domingo said in March.

Bangko Sentral is working with lenders to fix a benchmark for loan pricing this year, Tetangco said. An overnight index swap, which is an average of swaps and central bank facilities such as SDAs and the reverse repurchase facility, will be used for loans up to one year. Loans with longer tenors will be based on a zero-yield curve priced off government securities, he said.

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