SDA rate cut seen to drive away speculative money

MANILA, Philippines - The reduction in interest rate on special deposit accounts (SDA) will drive away short-term speculative portfolios, ING chief economist for Asia Tim Condon said yesterday.

Condon said that limiting the inflow of short-term speculative portfolios could temper the strong appreciation of the peso against the dollar.

 â€œWe think the SDA rate cut is responsible for the newfound weakness of the peso,” Condon said.

He added that any further cuts in SDA rate would “depend on whether the 100-basis points year-to-date cuts has been enough.”

The Bangko Sentral ng Pilipinas (BSP) reduced the SDA rate twice. First the central bank trimmed it down to three percent in January, then reduced it some more to 2.5 percent on March 14.

The rate cuts followed the significant appreciation of the peso and the mounting losses of the BSP as a result of the exchange rate movement.

Before the latest round of SDA cut, the peso, along with the Thai baht, were the two currencies that appreciated most than any other Asia except Japan currencies.

“The weakness in the peso could lead to outflows of hot speculative money, reduce the use of the BSP’s almost P2-trillion SDA facility, lead to some foreign profit taking of Philippine composite stocks, and lessen foreign buying of government bonds,” Condon said.

The exit of hot money could be “painful in the short term,” the ING chief economist said.

 â€œWe think adoption by the BSP of a Bank Indonesia-like interest rate corridor system with the ultimate aim of increasing two-way peso risk would be excellent monetary policy,” he said.

An interest rate corridor system helps central banks maintain rates at levels consistent with their desired monetary policy stance while also curbing short-term interest rate volatility.

By creating two-way risk, it would be difficult for speculative investors to predict whether the exchange rate could go up or down in value at any given moment, Candon said.