MANILA, Philippines - London-based think tank Capital Economics Ltd., expects monetary authorities to raise the reserve requirements for banks to pre-crisis levels next month as part of the lifting of liquidity enhancing measures that were adopted during the height of the global financial crisis.
In its Emerging Asia Economics Update entitled “Philippine elections to bring long run market gains,” Capital Economics said the Bangko Sentral ng Pilipinas (BSP) would first raise the reserve requirement for banks back to 21 percent from 19 percent in June before tweaking its key policy rates by July.
“We expect that the BSP will nudge the reserve ratio back up to its pre-crisis level (of 21 percent) at the next meeting on 3rd June and anticipate that the BSP will then lift the reverse repo rate by 25 basis points at the meeting on 15th July,” the think tank said.
As part of its liquidity enhancing measures to cushion the impact of the global financial meltdown in November of 2008, the central bank slashed the reserve requirement of banks to 19 percent from 21 percent to release more money into the financial system.
Reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in deposits with the BSP and therefore may not lend.
Deposits maintained by banks with the BSP up to 40 percent of the regular reserve requirement are paid interest at four percent per annum, while liquidity reserves are paid the rate on comparable government securities less half a percentage point.
The decision to slash the reserve requirements for banks by two percetage points freed up to P60 billion into the financial system.
However, monetary authorities already hinted that they are not inclined to tweak the reserve requirement of banks to maintain the current level of liquidity in the financial system to support economic growth this year.
They pointed out that the BSP is comfortable with the current level of reserve requirements of banks and would only make the necessary adjustments if there is a need to siphon off or release funds into the financial system.
Capital Economics expects the BSP to raise its policy rates by 100 basis points this year and by another 50 basis points next year.
“We continue to forecast that rates will be lifted to 5.0 percent by year-end, and then on to 5.5 percent by end-2011,” the think tank added.
The BSP’s Monetary Board slashed its key policy rates by 200 basis points to a record low four percent for the overnight borrowing rates and six percent for the overnight lending rates between December of 2008 to July of 2009 to cushion the impact of the global economic meltdown.
It has kept its rates at record lows for seven straight policy setting meetings since July last year but has continued to unwind crisis-related measures adopted in November of 2008 to release liquidity into the financial system to support domestic economic activity to survive the global economic meltdown.