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Philippines considers reserve rate cut

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October 21, 2008

Philippines considers reserve rate cut
The Philippines central bank might cut banks' reserve requirements and has the flexibility to reduce interest rates to protect the economy from the global financial crisis, Reuters quoted officials as saying Monday.

Budget figures showed that the government has increased spending, hoping to offer some support to the economy, whose exporters could suffer as major demand centres such as Europe and the United States tip towards recession in the face of the worst financial crisis in decades.

Central bank Governor Amando Tetangco said on Friday that the central bank had approved fresh measures to boost liquidity and added on Monday that the authority was studying the possibility of a cut in banks' reserve requirements to create more liquidity in the financial system.

"I have asked our monetary stability sector to study the impact of a possible reduction in reserve requirements," he told reporters.

"They are doing that now, and I would expect them to submit the results of the study and recommendations soon."

Philippine banks have to park 10 percent of total deposits in non-interest earning regular reserves with the central bank and 11 percent in liquidity reserves, which earn market interest rates. The central bank has not tweaked banks' reserves ratios since July 2005.

Tetangco said a 1-percentage-point cut in reserve requirements would free up to 30 billion pesos ($623 million).

He said also that with inflation now coming down off a near 17-year high in August, the central bank was looking at ways to increase liquidity, adding that the bank also had the flexibility to lower interest rates.

On Friday, the central bank said it had approved measures that would boost peso and dollar liquidity to shield local markets from tight credit conditions around the world.

It approved the opening of a short-term dollar repurchase facility and enhanced an existing peso repurchase window.

It also approved a dollar-denominated deposit window for banks with excess cash to prevent foreign exchange flowing out of the country.

"With the situation now, even if there is no tightness yet, they want to feel they're awash with liquidity," Diwa Guinigundo, deputy central bank governor said, regarding banks. "They want to be sure and I think the issue is confidence."

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