ASEAN KEY DESTINATIONS
Philippines central bank increases reserves
In a briefing, BSP Governor Amando Tetangco Jr. said the latest baseline forecasts show a lower path for inflation, while inflation expectations have shown some signs of leveling off. “These developments suggest that the two previous policy rate adjustments are starting to work their way through the system,” he said.
The two previous policy rate increases brought the overnight borrowing and lending rates to 4.5 percent and 6.5 percent.
Tetangco said the BSP’s decision to raise the reserve requirement was a “preemptive move to counter any additional inflationary pressures from excess liquidity.”
Monetary authorities hiked the reserve requirement on deposits and deposit substitutes of all banks and non-banks with quasi-banking functions by a percentage point effective June 24.
The required reserves of each bank are proportional to the volume of its deposit liabilities and ordinarily take the form of a deposit in the BSP. Reserve requirements stand at 8 percent for universal banks, and 5 percent for both thrift and rural banks.
With total deposits of about P3.8 trillion, this move will siphon off about P38 billion, or 0.9 percent of the country’s money supply.
“The Monetary Board believes that expectations of continued strong capital inflows, driven by positive market sentiment over the favorable prospects for the Philippine economy, could fuel domestic liquidity growth and contribute to inflation risks. The move to raise the reserve requirement—which will apply to regular reserves—is also part of the normalization of the liquidity-enhancing measures adopted during the global financial crisis,” Tetangco said.
The BSP chief said risks to the inflation outlook remain, thus warranting vigilance from monetary authorities.
“The BSP therefore remains prepared to implement further monetary measures as necessary to safeguard price stability,” he said.
Deputy Gov. Diwa Guinigundo said the inflation forecast could have averaged between 4 percent and 5.06 percent this year and 3.9 percent in 2012 without the hike in reserve requirements.
“With the [reserve requirement] higher by 1 percentage point, we would expect the inflation forecast for both years 2011 and 2012 will further level off to a lower path. We are now more certain that the inflation forecast for both years will now be within the 3 percent to 5 percent target range,” Guinigundo said.
Although its current inflation forecast continues to lean on the higher end of the target, “it is now within a comfortable range compared to what it was in May with forecast average at 5.6 percent and 4.16 percent for 2011 and 2012, respectively, Guinigundo said.
“The reserve requirement move will improve the efficacy of the interest rate channel of monetary policy,” he added.
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