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Philippine central bank cut reserve requirement

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November 8, 2008

Philippine central bank cut reserve requirement
The Philippine central bank cut bank reserve requirements by 2 percentage points in an unexpected move on Friday to inject more liquidity into its banking system and guard against the global financial crisis, reported Reuters.

The decision was announced after a regular central bank meeting, which does not usually discuss monetary policy. It follows similar moves in recent weeks by China, India, Taiwan and Vietnam to shield their economies from the world's worst financial crisis in decades.

The cut in the regular or statutory reserve requirements takes effect from November  14 and may allow the central bank to keep its key overnight interest rates on hold at its rate-setting meeting on November 20, some analysts and bankers said.

"They may hold off cutting (interest) rates now, no cut in the near term," said Benedicto Jose Arcinas, treasurer at Export and Industry Bank. "They should keep rates at these levels so as not to stoke inflation."

The move takes the regular reserve requirements to 8 percent from 10 percent, which analysts said would release about 60 billion pesos ($1.23 billion) into the financial system.

Liquidity reserve requirements remain at 11 percent.

The central bank last tweaked banks' reserve ratios in July 2005 when it raised the ratio by 2 percentage points. A cut in reserves requirements was seen feeding through to the economy faster than a rate cut.

"An actual interest rate cut can take some time to filter though into the markets, so a number of these central banks are preferring to use cuts in reserve requirements," said Ken Akintewe, fund manager at Aberdeen Asset Management.

"It (Philippines) didn't embark on a particularly aggressive rate hiking cycle compared to somewhere like Indonesia or other high-yielding markets. So you would expect that on the downside you wouldn't see overly aggressive rate easing."

The Philippine central bank also increased its budget for its peso rediscounting facility to 40 billion pesos from 20 billion pesos, allowing more banks to obtain fresh cash from the central bank using promissory notes or other eligible debt for short-term liquidity needs.

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