Philippines keeps key rate steady, cuts SDA rate again

    The Philippine central bank kept its benchmark overnight borrowing, or reverse purchase facility, rate steady at 3.50 percent but again cut the rate on its Special Deposit Account (SDA) facility due to a "benign inflation outlook and improving growth prospects."
    Bangko Sentral ng Pilipinas (BSP) cut the rate on the SDA facility by 50 basis points to 2.50 percent  on all maturities, effectively immediately. In January the BSP set the SDA rate at 3.0 percent, the first time it was set below the benchmark rate.
    The BSP said the decision to keep benchmark rates steady was based on its view that inflation was "likely to remain manageable" - a phrase often used by the central bank - and inflation expectations also remain firmly anchored.
    "Although global economic activity has gained traction, lingering fiscal and financial market stresses in the advanced economies continue to dampen the broad outlook, thereby mitigating upward pressures on commodity prices," the BSP said.
    However, further capital inflows, along with rate adjustments to domestic power rates and stronger growth in domestic liquidity posed upside risks to the inflation outlook, the central bank cautioned.
   "Latest baseline forecasts have risen slightly due to the higher inflation out-turns in recent months but continue to track the lower half of the 4 +/- 1 percent target range for 2013 and 2014," the bank said.
    The Philippines' headline inflation rate rose to 3.4 percent in February from January's 3.0 percent within the BSP's forecast of 2.8-3.7 percent for the month. The central bank attributed the rise to higher prices on food, alcohol and tobacco, and domestic petroleum products.
    On average, the inflation rate is 3.2 percent year-to-date, within the government's 2013 target range of 3-5 percent, the central bank said earlier this month. The core inflation rate rose to 3.8 percent in February from 3.6 percent.

    BSP cut rates by a total of 100 basis points in 2012, most recently in October as low inflation gave it room to ease policy. Since then, the central bank has maintained its policy stance to allow the rate cuts work their way through the economy.

    The Philippine's Gross Domestic Product in the fourth quarter rose by 1.5 percent from the third quarter for annual growth of 6.8 percent, down from the third quarter's 7.2 percent.

    The bank is using its SDA to help contain the effects of foreign capital inflows from abundant global liquidity. Previously, the SDA rate was at a premium to the benchmark rate and this attracted capital, not only costing the central bank funds but also detracting from funds that could be used for lending. The bank also tightened rules on the SDA to make it more difficult for foreign funds to use.
    Earlier this week the BSP's governor said the central bank would be moving to an interest-rate corridor system.

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