High inflation hampers BSP plan to cut banks’ liquidity reserves

The higher-than-expected inflation rate for November could hamper plans by the Bangko Sentral ng Pilipinas (BSP) to cut banks’ liquidity reserves by one percentage point.

BSP Governor Rafael B. Buenaventura said the Monetary Board will discuss the matter during its regular Friday board meeting.

Inflation shot to a 17-month high of six percent in November due to a rising fuel prices and a sagging peso, the National Statistics Office (NSO) reported yesterday.

However, Buenaventura downplayed the uptick saying that it was within their estimates of 5.5 percent to 6.4 percent for the month.

Earlier, Buenaventura said that if the November inflation is within the range expected by the government, the BSP would have leeway to lower banks’ liquidity reserves by about one percentage point.

The one percentage point reduction would release about P14 billion into the financial system.

"The latest uptick in inflation was driven largely by supply-side influences," Buenaventura explained.

Inflation normally rises during the holiday season due to the traditional holiday surge in demand.

"The recent signs of steady improvement in the foreign exchange market and the decline in the benchmark interest rate that point to a subsiding cost and demand pressures can provide some scope in the future for a gradual monetary easing," the BSP chief said.

Buenaventura also gave assurance that "the BSP will continue to monitor all relevant economic indicators that could flag any possible build-up in inflationary pressures."

Analysts said the higher-than-expected inflation could also affect plans by the government to cut interest rates, which were raised previously to cushion the plunging peso.

"I think they’ll probably take stock now. They said they will try to reduce the overnight rate again but this might be premature right now," All Asia Capital and Trust Corp. economist Ronnie Balagot said.

The BSP decided last week to lower its overnight borrowing rate to trigger a further decline in bank lending rates to spur loan demand and improve economic activity.