Philippines' central bank slashes SDA rate to 2.5%

Acceleration in credit growth seen in the coming quarters.

In an effort to reduce speculative inflows and to reduce costs of soaking up liquidity, the central bank (BSP) has cut the special deposit account rate (SDA) rate to just 2.5%. 

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At these levels, we think that commercial banks may be inclined to adjust their asset mix. From a balance sheet perspective, the SDA presents banks with a way to earn a risk-free return simply by placing deposits with the BSP.

However, with the low rate of return currently, SDA funds may instead be channeled to higher yielding government bonds and also induce banks to provide more loans.

As such, an acceleration in credit growth may take place over the coming quarters. At this point,the pace ofloan growth is still moderate at 16.6% YoY in January and we are not concerned about the potential deterioration of asset quality just yet.

That said, the situation is likely to change by the end ofthe year and BSP may need to cool the economy.

If inflows persist, aggressive rate hikes would be out of the question. Instead, a combination of mild rate hikes with higher reserve requirement ratios is more probable.