Banks told to hike reserves

MONETARY AUTHORITIES ended a run of policy rate hikes yesterday but raised the bank reserve requirement in the continuing effort to control inflation.

The one-percentage-point increase in the reserve requirement to 20%, to take effect on June 24, is a “preemptive move to counter any additional inflationary pressures from excess liquidity,” central bank Governor Amando M. Tetangco, Jr. said.

Deputy Governor Diwa C. Guinigundo added, “The hike in reserve requirement is seen to siphon P38 billion in deposits and 0.9% in domestic liquidity.”

Majority of analysts earlier polled by BusinessWorld expected another 25-basis-point (bps) rate hike. The rest, however, said the Bangko Sentral ng Pilipinas (BSP) would hold off from a third consecutive adjustment given a first quarter growth slowdown and May inflation hitting the lower end of the central bank’s forecast for the month.

Earlier this month, the BSP reported that domestic liquidity had grown by 7.3% in April to P4.2 trillion. The expansion, however, was down from March’s 10.3%.

“[E]xpectations 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,” Mr. Tetangco said.

Foreign portfolio investments — also known as “hot money” given the ease with which the funds can be placed in and pulled out of an economy — surged to $2.02 billion as of May 27, up from $748.98 million during the comparable 2010 period.

Mr. Guinigundo said, “Uncertainty in the monetary environment, coupled with multispeed economic recovery of advanced economies and growth rebalancing,” had led to the increase in inflows.

“Without the hike in reserve requirement inflation would have averaged at 5.06% in 2011 and 3.9% in 2012,” he said. “Now, it (inflation) is again well within our 3-5% target for this year and the next, with inflation for this year averaging at the upper bound of the target and next year at the lower bound.”

Read more at Business World

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