RRR hike to reduce liquidity by 10-15%

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Recent moves by the central bank to slightly tighten the reserve requirement ratio (RRR) of banks is likely to pull down the growth of the country’s money supply, according to local analysts.

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In the May issue of their Capital Markets Research alliance’s publication, The Market Call, financial firm First Metro Investments Corp. (FMIC) and the University of Asia and the Pacific (UA&P) said that the hike in the banks’ RRR will mop up excess domestic liquidity by the third quarter of this year.

Domestic liquidity is the amount of cash and cash-equivalent securities circulating within the economy.

“The impact of BSP’s [Bangko Sentral ng Pilipinas] raising of the reserve requirement by 2 percentage points since the beginning of the year, together with higher base in the third quarter of 2013, should bring down money growth to 10 percent to 15 percent in the third quarter of 2014,” the report stated.

At its March 27 monetary policy meeting the Monetary Board decided to increase the RRR of banks to 19 percent and then followed this up at its May 8 meeting with an increase to 20 percent, to guard the economy against risks that could arise from strong domestic liquidity.

The central bank said that the level of domestic liquidity is expected to start normalizing by the beginning of the second semester of 2014, as the BSP continues to monitor the effect of its RRR adjustments.

Monetary authorities have been closely monitoring liquidity growth as this may have an impact on domestic inflation.

The central bank is targeting inflation to be within a range of 3 percent to 5 percent in 2014, and 2 percent to 4 percent in 2015.

For this year, inflation is projected to average 4.3 percent, factoring in the possible effects of the El Niño phenomenon on food and non-food agricultural prices in the latter part of the year.

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