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BSP hikes reserve requirement

By Julito G. Rada | Mar. 28, 2014 at 12:01am [ ]

The Bangko Sentral on Thursday kept key interest rates at record low, but asked banks to increase reserves by one percentage point, in what is viewed as the first sign of monetary tightening to curb fast liquidity and inflation.

Bangko Sentral Governor Amando Tetangco Jr. said the policy-making Monetary Board increased the rate on reserve requirement of banks by one percentage point effective April 4.

The Bangko Sentral requires all banks to maintain reserves against deposits in a bid to control the volume of money created by the credit operations of the banking system.

“The Monetary Board’s decision to raise the reserve requirement is intended to guard against potential risks to financial stability that could arise from continued strong liquidity growth and rapid credit expansion,” Tetangco said.

The Monetary Board, however, kept the key policy rates at 3.5 percent for overnight borrowing and 5.5 percent for overnight lending. The interest rate on special deposit accounts of 2 percent across all tenors was also kept steady.

Bangko Sentral Deputy Governor Diwa Guinigundo said the reserve requirement for universal and commercial banks was increased to 19 percent from 18 percent; for thrift banks, to 7 percent from 6 percent; and for rural banks, to 5 percent from 4 percent.

Guinigundo said the adjustment in reserve requirement would result in around P60 billion going into the vault of the Bangko Sentral.

The pressure for accommodative policy has waned and the Philippines needs measures to absorb liquidity and prevent stretched asset valuations, the International Monetary Fund said Wednesday.

Tetangco earlier this month said the central bank’s scope to hold interest rates had narrowed, and that a preemptive move could be less disruptive.

“It’s best to be prudent, as the risk of higher prices persists,” Jan Briace Santos, a debt trader at BPI Asset Management said before the decision.

Domestic liquidity as of end-January expanded 38.6 percent to P6.9 trillion from P4.984 trillion a year ago, due to higher demand for credit in the domestic economy.

The Bangko Sentral said inflation rate in March could accelerate to as high as 4.6 percent from 4.1 percent recorded in February, driven mainly by high rice prices.

 “Inflation in March is expected to settle within [the] 3.7 percent to 4.6 percent range. Upward price pressures could come mainly from rice prices due in part to the ongoing lean season,” Bangko Sentral Governor Amando Tetangco Jr. said in a text message to reporters.

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