Philippines moves to stem inflow of funds
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The Philippines' central bank may soon ban foreign funds from being invested in its overnight borrowing facility, in a move to address risks of the country attracting even bigger volumes of speculative capital from abroad.
Prohibiting foreign funds from being parked in the reverse repurchase (RRP) facility of the Bangko Sentral ng Pilipinas (BSP) is seen as complementing the standing rule against the investment of foreign funds in special deposit accounts (SDAs) in the BSP.
According to economist Felipe Medalla, who sits on the policymaking BSP’s Monetary Board, growing liquidity in the domestic economy necessitated appropriate policies that would help ensure inflation would be contained within manageable levels.
Therefore, he said that making sure that the BSP’s facilities did not attract foreign funds that could cause a further build-up in domestic liquidity was on the agenda of monetary officials.
Last week, the BSP further cut the interest rate on SDAs to 2.5 per cent. This followed a move in January to slash interest rates on SDAs to a uniform 3 per cent (previous rates were set above 3.5 per cent).
The cut in the SDA rate was expected to further discourage the inflow of foreign funds, but there was suspicion some foreign funds were still being invested in SDAs.
But with the SDA rate now much lower than the central bank’s RRP, or overnight borrowing rate, which stands at 3.5 per cent, Medalla said there was a probability that some funds from the SDAs might simply shift to RRPs.
He said that given the objective of keeping inflation modest, the BSP would be willing to accommodate more deposits in its RRP facility should domestic liquidity grow.
In particular, he said the BSP might avail itself of more government securities to increase its capacity to accommodate deposits through the RRP facility (under the central bank’s charter, the amount of deposits it can accept from banks through the RRP facility is limited by its holdings of government securities, which serve as collateral).
However, he said it was not the job of the BSP to accommodate foreign funds.
“If the RRP attracts foreign money, then that would defeat the purpose [of tempering liquidity growth in the domestic economy],” Medalla said yesterday. “We [BSP] don’t want to mop up excess global liquidity.”
