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Bond trading ban hobbled BSP monetary policy

Philippine Daily Inquirer
First Posted 00:08:00 08/22/2009

Filed Under: Economy and Business and Finance

THE BANGKO SENTRAL NG PILIPINAS SAID it was necessary to keep the special depository account [SDA] facility in place, despite it having accumulated nearly P600 billion in deposits, unless the monetary authority would be allowed to trade its own bonds.

Diwa Guinigundo, deputy governor at the central bank, said the BSP was the only monetary authority in the world that is not allowed to buy and sell its own bonds. Because of this, the BSP needed the SDA facility to help manage liquidity in the system, he said.

Critics of the scheme noted that banks? deposits in the SDA facility could be better utilized if they were lent out as economy-stimulating loans.

?There are no central bank securities that we can float. The BSP is handicapped and does not have full latitude of monetary instruments to stabilize price conditions in the country. That is why we need the SDA [facility],? Guinigundo told reporters Thursday evening.

Other central banks buy and sell bonds to control supply of money within their economies in so-called ?open market operations.? In times of high inflation, foreign central banks sell bonds to immobilize excess money, thereby tempering growth of demand and increases in consumer prices. On the other hand, during times of crises when economies needed pump-priming, foreign central banks buy back their bonds to release money into the system.

In the case of the BSP, it relies on its key policy rates, which will influence the amount of deposits to be placed by banks in its overnight lending and borrowing facilities, and the SDA facility.

Reductions in the BSP?s key policy rates are aimed at encouraging banks to lend more to the public instead of parking their money at the central bank.
However, banks could not be forced to increase lending or decrease their deposits with the central bank.

Despite BSP?s 200-basis-point rate reduction from December to July, the amount of deposits to its SDA facility continued to rise. According to central bank data, placement by banks to the SDA facility stood at P585 billion as of end-June. The amount was P138 billion higher than that as of the same period last year.

Guinigundo agreed that banks are not lending as aggressively as they should. Nonetheless, he said the BSP could not shut down the SDA facility as some people were suggesting because of its important role in management of liquidity.

He said the BSP was pushing for the enactment of the bill seeking to amend the central bank?s charter. Under the BSP?s proposed bill, it will have the right to trade its own bonds.

Guinigundo said the BSP could consider taking away the SDA facility if it were allowed to buy and sell its own bonds.

In the meantime, he said, the central bank was continually urging banks to lend more and keep from tightening their lending standards in order to encourage demand.

The BSP earlier reported that outstanding loans granted by the country?s commercial banks amounted to P2.13 trillion as of end-May, registering an annual growth rate of 10.2 percent.

Regulators said the double-digit growth in bank lending was an indication that the country was not facing threats of credit crunch and that the banking system remain awash in cash. Nonetheless, the growth was a stark slowdown from last year?s over 20 percent.

Michelle V. Remo

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