Philippines' central bank retains policy rate at a record-low 3.5%

Meanwhile, government slashes special deposit accounts rate.

According to Maybank Kim Eng, the central bank kept the policy rate at a record-low 3.5% as risks to the inflation outlook remain evenly balanced and the central bank’s inflation forecast is tracking the low end of the 3-5% inflation target. 

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However, the rate on special deposit accounts (SDA) once again was reduced 50bp, to 2.5%. Even with the SDA rate lower than the policy rate since January, the amount in SDA has risen instead of the expected decline.

This is because the 1m SDA rate has been at a considerable premium to the 91d T-bill rate. Even the latest 2.5% 1m SDA rate is much higher than the 0.08% 91d T-bill and 0.57% 1yr T-bill so it is likely an increase in liquidity that usually accompanies a rate cut will not materialize again. It is likely the central bank will continue to cut the SDA rate until it is at par with the closest comparable security such as T-bills to cut interest payments.

Further cuts beyond this could result in additional liquidity in the financial system. At that juncture other measures hinted at may be resorted to, such as the reserve requirement on trust deposits.