BSP Governor Amando Tetangco Jr. said the move was aimed at siphoning off excess liquidity and to curb its impact on the peso. "Excess liquidity can lead to more inflation," Tetangco said after announcing the move.
The BSP decision effectively raised the regular reserve requirement from nine percent to 10 percent while banks’ liquidity reserve requirements was raised from 10 percent to 11 percent.
"The Monetary Board had observed that excess liquidity has found its way into the foreign exchange market and contributed to the depreciation of the peso," Tetangco said.
At yesterday’s trading at the Philippine Dealing System (PDS), the peso hit a low of 56.390 to the dollar during intraday trading, dangerously close to a record low of 56.45 reached in the run-up to May 2004 elections and revisited last October.
The local currency, however, managed to recover at the end of trading to settle 10 centavos lower at 56.280 from Wednesday’s close of 56.190 to the dollar. The peso has fallen 0.6 percent this month.
Tetangco said the adjustments would have the immediate impact of mopping up about P32 billion from the market.
"We hope this would be enough to remove the fuel from the continued depreciation of the peso."
Tetangco said the Monetary Board approved a one-percentage point increase on the regular reserves and liquidity reserves against peso demand, savings, time deposit and deposit substitutes of universal banks, commercial banks and common trust funds.
The liquidity reserves for trust and other fiduciary accounts will also be increased by one percentage point while the regular reserve on deposit liabilities of UBs and KBs will be raised from nine percent to 10 percent as well as those of CTFs.
In addition, Tetangco said the liquidity reserves on deposit liabilities if UBs and KBs will be raised to 11 percent from 10 percent, as well as the liquidity reserves for CTFs and TOFA-Others.
"If oil prices were to be sustained at high levels, that will not be good for the peso’s outlook,’’ said Yen Ping Ho, a currency strategist at JPMorgan Chase & Co., said in Singapore. Rising crude costs "will mean a deterioration of the balance of payments account."
Crude futures rose as much as 25 cents, or 0.4 percent, to $61.53, the highest since the contract began trading in 1983, in after-hours electronic trading on the New York Mercantile Exchange.
Analysts also said opposition allegations of election cheating against the President and of graft by her family, combined with a restraining order by the Supreme Court on a broader national sales tax, have continued to put pressure on the peso.
"They are all factors which in a sense nail a ‘keep out’ sign on the Philippines at this point," said Song Seng Wun, regional economist at G.K. Goh Securities in Singapore.
"If one of each is being resolved, then this will be a small step in the restoration of investors’ confidence. Otherwise, it’s just another marginal market which is not worth taking a risk in," Song said.
A rally by the dollar and record oil prices are also weighing against the peso.
"While the baseline scenario remains for President Arroyo to ride through the present storm, there is likely to be more volatility before the sky starts to clear," said Sani Hamid, economist at 4cast Ltd.
But Hamid said sentiment on the peso could improve after an annual state-of-the-nation address by Arroyo on July 25, when she is expected to announce major policy changes to bolster investor confidence.
Many economists are not reworking their forecasts for the peso – which ranges from 55 to 56 per dollar by year end – until they have a strong view on whether President Arroyo will survive the worst crisis of her four-year presidency.
JPMorgan said in a report it expects the peso to hit 56.50 by the end of the third quarter but firm to 55.50 by year end.
Economists expect huge remittances from Filipinos working abroad – comprising nearly a 10th of the country’s 85 million population – and an improving fiscal position would lift the peso by the end of the year.
The peso has lost 2.7 percent against the dollar since the end of March, much of it in the past month. But it has still outperformmed the Korean won and Indonesian rupiah, which both fell 3.4 percent, and the Thai baht, which fell 5.8 percent. – With reports from Bloomberg, Reuters