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By Al Labita

Monetary authorities may not admit it, but they appear edgy over how to tame a financial market which has gone awry.

Inflation, which measures the nation’s economic health, has surged to 4.5% in May, the fastest since November 2011.
Inflation, a key component in formulating monetary policy, was seen averaging 4.3 percent this year and by 3.4 percent for next year.

That, in turn, raised a red flag on whether it would trigger a rise in interest rates as they affect business transactions.
And as many expected, the Bangko Sentral Ng Pilipinas (BSP) turned to so-called special drawing rights (SDRs), jacking up the interest rates it pays to depositors from two to 2.25 percent per annum.

As everyone knows, SDRs are where the rich and the famous park their excess funds amounting to billions and get paid for it.

Risks to instability
This was meant to mop up excess liquidity in the system by making the SDRs attractive to depositors.
Usually, funds invested in SDAs are effectively taken out of the system and kept in the vaults of the central bank.

No matter the hefty costs SDAs carry, the BSP was willing to absorb rather than risk instability in an economy that has proven weaker than expected in the first three months.

BSP data showed that total deposits in the special facility, which at their peak were more than P2 trillion early last year, retreated to just P1.2 trillion as of mid-May this year.

At the current level of deposits, the BSP’s interest payables to depositors total around P27 billion, a big number seen to grow even bigger as the central bank endeavors to attract more funds to its vaults.

The BSP has been unprofitable as a government corporation for four consecutive years already, owing to its huge SDA-driven interest expenses, based on records.

In 2012, for instance, the BSP incurred a net loss of P95.38 billion. This improved to a net loss of only P24.26 billion the following year, when it adopted measures that encouraged SDA depositors to make placements elsewhere, reducing the central bank’s interest expenses in the process.

Because the central bank’s mandate to keep prices stable costs a lot of money to pursue, the monetary authorities seek appropriate amendments to its charter that would allow the national government to raise its paid-up capital contribution to Php150 billion.

Analysts lauded the BSP for its decision raising SDA’s rates despite the heavy costs it entails on its finances.
They say the hike was a commendable move, as it sends a clear signal that BSP’s interest expenses, which naturally result from higher policy rates, take a low rank in the hierarchy of the BSP’s policy priorities.

The BSP’s decision to hike the SDA also demonstrated that the below-consensus GDP growth print for the first quarter of 2014 was not going to get in the way of carrying out their price-stability mandate, other pundits say.

While it was important to keep the BSP loss-free and operationally sound, the mandate to keep prices stable throughout the US$250-billion economy always comes out a priority.

While the BSP has raised the rates on SDRs, it has kept steady key policy rates at 3.5 percent for the overnight borrowing or reverse repurchase (RRP) facility and 5.5 percent for the overnight lending or repurchase (RP) facility, ostensibly taking into account the plight of ordinary borrowers.