Lower SDA rates welcomed: Move expected to result in lower consumer loan rates

MANILA, Philippines - The Bangko Sentral Ng Pilipinas’ move to lower interest rates on special deposit accounts (SDAs) is expected to result in lower yields for government securities, First Metro Securities Corp. said.

The BSP slashed SDA rates by roughly 60 basis points to three percent across all maturities.

The SDA is one of the tools used by the central bank to mop up excess liquidity in the financial system. Excess funds can lead to inflation.

The central bank’s primary task is to contain inflation in the country.

As of Dec.28 last year, funds in BSP’s SDA  amounted to around P1.67 trillion as banks were attracted to deposit funds to the virtually risk-free and relatively high-yield BSP facility.

“We may see some of this liquidity look for higher yielding assets,” First Metro Securities said.

First Metro Securities said the move could also lead to lower interest rate on consumer loans.

The brokerage arm of the Metrobank Group of taipan George S.K. Ty,  said the peso might depreciate but sees this as an opportunity for foreign exchange and carry traders. 

The lower rates offered by the central Bank will encourage banks to lend more to the public.

Central bank officials said the new rate is still higher than the rates offered by regular savings and time deposit accounts.  The facility is also backed by the BSP so there is a low risk of default.

SDAs are the preferred investment choice for people looking for safe, highly-liquid but high interest earning instruments.

Investors can already earn interest in just a month.  This, however, may pose a risk to the country’s foreign exchange market.

Foreign funds flowing into the country contribute to an appreciating peso which can produce volatility in the peso-dollar exchange rate.

Meanwhile, lower interest rates on funds parked at its SDA should benefit the  BSP by trimming down its losses while shunning capital inflows at the same time, analysts said

Introduced in 1998, SDA is part of BSP’s macroprudential toolkit that aims to siphon off excess domestic liquidity from the market which may stoke inflation. The idea is to contain money supply and in order to attract placements, BSP offers premium to investors.

Raul Victor Tan, senior vice president at the Rizal Commercial Banking Corp., said the BSP is hoping it could discourage inflows into the SDA now that the rate it charges is lower than inflation. Inflation averaged at 3.2 percent in 2012. – With Prinz Magtulis