The Philippine central bank has decided to further raise the reserve requirement ratio (RRR) for commercial banks by 1 percentage point to 20 percent effective May 30 to guard against risks that could arise from strong domestic liquidity.
At the same time, the Bangko Sentral ng Pilipinas (BSP) kept its key policy rates unchanged based on its assessment that the current monetary policy settings “continue to be appropriate given a manageable inflation environment.”
In a press briefing on Thursday, BSP Governor Amando Tetangco Jr. said the Monetary Board decided to keep the interest rate for overnight borrowing or reverse repurchase (RRP) facility at 3.5 percent and the rate for overnight lending or repurchase facility (RP) at 5.5 percent.
The interest rates on term RRPs and RPs, as well as special deposit accounts (SDAs) were also kept steady.
The Monetary Board last raised banks’ reserve requirement to 19 percent in its March 27 meeting.
In explaining the move, Tetangco said the Monetary Board noted that the balance of risks to the inflation outlook continues to lean toward the upside, with potential price pressures emanating from the possible uptick in food prices as a result of expected drier weather conditions as well as pending petitions for adjustments in transport fares and power rates.
“I think the recent move of the BSP was appropriate as they flagged liquidity as a problem, but they could soon be doing more given the threat of rising prices in the near term,” said Nicholas Antonio Mapa, associate economist at the Bank of the Philippine Islands.
However, Mapa noted that with the El Niño weather phenomenon set to hit in mid-year and possible transport and power rate adjustments, the scope to keep interest rates low has truly narrowed.
“Perhaps the central bank would like to see first quarter gross domestic product figures and the effect of the first RRR increase on domestic liquidity, but they may have to hike perhaps as soon as their next policy meeting in June to help ensure they achieve their inflation target in 2015,” he added.
Citing the latest baseline forecasts, the BSP said that the future inflation path is likely to stay within the target ranges of 3 percent to 5 percent for 2014 and 2 percent to 4 percent for 2015.
Nonetheless, the central bank has increased its inflation forecast for this year to 4.3 percent from the previous projection of 4.2 percent.