Philippines cuts SDA rate by 50 bps but holds policy rate

    The Philippine central bank kept its main policy rates steady but again cut the interest rate on its Special Deposit Account (SDA) facility by 50 basis points to 2.0 percent for all maturities, moves that were expected, and said it would "deploy macroprudential measures as needed to pre-emptively address any potential misalignment in asset prices."
    The Central Bank of the Philippines (BSP) said its decision to maintain the benchmark overnight borrowing rate at 3.50 percent and the overnight lending rate at 5.50 percent was based on its assessment that inflation is "likely to remain manageable over the bank's policy horizon" and in the lower half of its target range for 4.0 percent, plus/minus one percentage point.
    The central bank has been using the SDA facility, which has now been cut by 150 basis points this year, to make it less attractive for foreign funds to park their money in the Philippines which tends to put upward pressure on the peso and fuel local asset prices.
    But by keeping the overnight borrowing and lending rates steady, the central bank is trying to ensure that there is enough liquidity to stimulate economic activity. The bank also maintained its reserve requirement ratios.
    The reductions in the SDA rate is part of the central bank's shift toward a corridor system for its interest rates, a system that has been used by other central banks, such as Turkey, to handle the "wall of liquidity" that is attracted to fast-growing economies from investors in many advanced economies where interest rates have been ultra-low since the global financial crises.
    Last year the Philippine peso appreciated by 6.8 percent against the U.S. dollar but since March the peso has been easing and portfolio investment data show a net outflow, which economists attribute to the central bank's move to cut the SDA rate.

    The bank's monetary board said the current benign inflation environment and robust domestic growth is providing its scope to absorb liquidity through the SDA facility, helping it fine-tune and gain flexibility in its monetary policy instruments and operations.

    Inflation in the Philippines eased to 3.2 percent in March, down from 3.4 percent, and last month the central bank raised its forecasts for full-year inflation to 3.3 percent from 3.0 percent.
    The risks to the central bank's inflation outlook are evenly balanced with downside risks from the strength of the global economy and the "relative firmness of the peso" while the upside risks stem from power rate adjustments and the "possibility of a sustained surge in liquidity owing to strong capital inflows," the bank's monetary board said.
    The country's Gross Domestic Product expanded by 1.5 percent in the fourth quarter from the third for annual growth of 6.8 percent, down from 7.2 percent in the third quarter.
    The Philippine economy expanded by 6.6 percent in 2012 and the government forecasts growth of 6-7 percent this year. Last month the central bank's governor said the economy was still in an expansion phase in the first quarter of this year.
    Last year the BSP cut its benchmark overnight borrowing, or reverse purchase facility (RRP) rate by 100 basis points, most recently in October in light of low inflation. Since then it has kept the rate steady to allow the lower rate to work its way through the economy and stimulate activity.

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