BSP mulls use of SDA as interest rate corridor

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is eyeing to use its special deposit account (SDA) as a stand-alone deposit facility under a plan to rationalize the use of policy rates in managing liquidity in the financial system.

Rates charged by SDAs —fixed-term deposits at the BSP — and by another “lending facility” will serve as “interest rate corridor” now being studied together with the International Monetary Fund, officials said.

“We are now carefully reviewing the interest rate corridor approach, given the successful experience of other central banks such as the ECB (European Central Bank) and Bank Indonesia,” BSP Governor Amando Tetangco Jr. said on Friday.

At present, policy rates serve a dual purpose: they determine the interest rate banks charge BSP whenever it lends or borrows money, while at the same time, they also serve as bank benchmarks in pricing their loans to consumers and investors.

The interest rate corridor mechanism will split the two functions between policy rates and rates of “standing facilities” of deposit and lending, BSP Deputy Governor Diwa Guinigundo said in a text message.

“Interest rate corridor allows a central bank to offer banks standing facilities for both lending and deposit… In between the interest they charge, the central bank would normally position the policy rate,” Guinigundo said.

This, in effect, will “signal the stance of monetary policy, whether it is biased towards easing or tightening,” he said.

This has been the international practice, Guinigundo said, and the BSP has begun the process of adoption when it “rationalized” SDA rates during its first policy meeting for the year last Jan. 24.

During its meeting, BSP’s Monetary Board kept policy rates unchanged at 3.5 percent for overnight borrowing and 5.5 percent for overnight lending. However, it reduced the SDA rate to three percent, across all tenors, from being originally pegged against the policy rate.

The goal was to divert funds from SDA, roughly P1.8 trillion, to other sectors of the capital markets such as the bond market or the local bourse. Tetangco said the interest corridor has similar objectives.

“As the corridor is adjusted, banks would be discouraged from parking their funds with the central bank and prevent the central bank from crowding out the private sector,” he said.

“The interest rate corridor system, among other benefits, would provide guidance for short-term interest rates and promote the development of the interbank capital market,” Tetangco said.

Banks see the plan as BSP’s way to encourage them to lend more to boost economic activity.

“They want to have more credit in the system,” said Antonio Moncupa Jr., chairman of the open market committee of the Bankers Association of the Philippines.

“But they also have to be careful since (too much) credit could also blow out the system,” he said.