BSP raises banks’ RRR to 19% in tightening move


The Philippine central bank has decided to raise the reserve requirement ratio (RRR) for commercial banks by 1 percentage point to 19 percent effective April 4, reflecting a slight policy-tightening move.

At the same time, the Bangko Sentral ng Pilipinas kept its policy rates unchanged after reducing its inflation forecast.

The BSP said the higher reserve requirement should prevent a rapid rise in liquidity and credit expansion, which otherwise, could threaten the stability of the country’s financial system.

In a press briefing on Thursday, BSP Governor Amando Tetangco Jr. said the interest rate for overnight borrowing was maintained at 3.5 percent and that for overnight lending at 5.5 percent. The rates on term reverse repurchase and repurchase facility, as well as special deposit account (SDA), were also kept steady.

“The Monetary Board’s decision to raise the reserve requirement is intended to guard against potential risks to financial stability that could arise from continued strong liquidity growth and rapid credit expansion,” Tetangco said.

The central bank last raised the banks’ RRR in 2011. The following year, or April 2012, the BSP cut the requirement from 21 percent to 18 percent. An economist said the BSP’s latest move reflect’s an “overly hawkish” stance on the part of the central bank.

“While not touching the policy rates or SDA rates, the effect of the reserve requirement increase is a slight tightening, which does not involve interest payments by the BSP. It is surprising that while food supply is normalizing and crude oil prices are getting softer, the BSP would still opt for a tightening no matter how slight,” Victor Abola, senior economist at the University of Asia and the Pacific, said.

“But ultimately, it is likely a way in which it wants to mitigate the pressure of the peso to depreciate. They still show no conviction that a weaker peso is beneficial for the economy,” he added.

On the other hand, the BSP said that in deciding to maintain policy rates, the Monetary Board considered 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.

The central bank has also lowered its inflation forecast this year to 4.2 percent from a previous projection of 4.3 percent.

“Inflation expectations also remain broadly aligned with the target over the policy horizon. At the same time, the Monetary Board noted that the balance of risks to the inflation outlook continues to be skewed to the upside, with potential price pressures emanating from pending petitions for adjustments in utility rates and from the possible increases in food and oil prices,” Tetangco said.

For March, the BSP said the inflation rate may settle within the 3.7 percent to 4.6 percent range as upward price pressures are seen coming from higher rice prices because of the lean season.

However, lower electricity rates and petroleum prices could offset some of the upside pressures, it added.

The latest inflation forecast by the central bank remains within the 3-percent to 5-percent target band for the year. In February, inflation stood at 4.1 percent.


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