All policy tools expected to be reviewed

VARIOUS TOOLS, such as tweaks to reserve requirements and special deposit accounts (SDA), will be reviewed by the Monetary Board when it meets today, a member of the policy-making body said yesterday.

“A good central bank will not rule anything out. We will consider everything in our toolkit to manage liquidity in the financial system,” Monetary Board member Felipe M. Medalla said in an interview at the sidelines of a forum in Makati City yesterday.

The Monetary Board convenes today to set policy rates — the benchmark for interest rates — which currently stand at 3.5% and 5.5% for overnight borrowing and lending, respectively. With rates already at record lows, other tools could be adjusted by authorities as well.

On the table is a proposal to increase reserve requirements, Mr. Medalla said, which will enable the Bangko Sentral ng Pilipinas (BSP) to control liquidity without incurring cost.

It will also give the BSP more money to buy dollars and manage movements of the exchange rate, he added.

Currently, banks are mandated to keep 18% of their deposits and deposit substitutes — promissory notes, certificates of assignment, bankers acceptances and other papers — with the BSP as reserves.

“However, while the BSP doesn’t pay interest on these, the cost will effectively be borne by the bank or savers,” Mr. Medalla said.

An increase in reserve requirements would hit banks as they expect to earn from their deposits and deposit substitutes, he explained. They could then pass this on to consumers.

Another tool is the SDA, as the BSP continues to streamline the facility’s operations.

“We can also widen the gap between the [overnight borrowing rate at 3.5%] and the [SDA rate at 3%],” Mr. Medalla said.

SDAs are fixed-term deposits by banks and trust entities with the central bank. It was introduced in 1998 as one of the tools to mop up excess liquidity in the financial system.

In January, interest rates on SDAs were cut to 3% across the seven-day, 14-day and one-month tenors. They used to be priced at a slight premium over the 3.5% overnight borrowing rate. The BSP sought to push out funds parked in the facility and add liquidity to the financial system, encouraging consumption and investment in support of the economy.

Since then, though, funds stubbornly remained in SDAs. A total of P1.855 trillion was parked in the facility as of Feb. 22, 2.37% more than the P1.812 trillion as of Jan. 25. SDA rates were slashed on Jan. 24.

“The SDA cut did not lead to reduction, but it takes time for people to move their money and mobilize it elsewhere,” Mr. Medalla said.

The side effect of the SDA rate cut, though, was that it saved BSP money from interest costs, he noted. Savings are estimated at P11 billion a year. — Diane Claire J. Jiao, Businessworld
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