BSP keeps key rates steady, hikes banks' reserves

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) kept its key interest rates unchanged but decided yesterday to raise the reserve requirement on deposits and deposit substitute of banks and non-banks with quasi-banking functions to siphon off at least P38 billion of excess liquidity in the financial system and counter any additional inflationary pressures.

BSP Governor Amando M. Tetangco Jr. said in a press conference that the central bank decided to keep its overnight borrowing rate unchanged at 4.50 percent and its ovenight lending rate at 6.50 percent on the back of benign inflation outlook.

“In deciding to maintain policy rates, the BSP noted that the baseline forecasts show a lower path and that inflation expectations have shown some levelling off. These developments suggest that the two previous policy rate adjustments are starting to work their way through the system,” Tetangco stressed.

The central bank adjusted interest rates by 25 basis points last March 24 and by another 25 basis points last May 5 as a preemptive move to keep inflation expectations well anchored amid the escalating price of oil in the world market. This brought the overnight borrowing rate to 4.50 percent and the overnight lending rate to 6.50 percent.

Without the series of rate increases, the country’s inflation forecast would have gone up to 5.6 percent this year and to 4.16 percent next year. The BSP has set an inflation target of three percent to five percent between 2011 and 2014.

However, the BSP’s policy rate setting body agreed to cut its inflation forecast to 5.06 percent this year and to 3.9 percent next year due to the lower than expected actual inflation last May.

Inflation rose to a 13-month high of 4.5 percent in May from the revised 4.3 percent in April but the BSP and the market were expecting consumer prices to breach the higher end of the central bank’s three percent to five percent target. Inflation averaged 4.2 percent in the first five months of the year from 4.3 percent in the same period last year.

Tetango pointed out that the BSP believes that risks to inflation outlook remains, prompting monetary authorities to raise the reserve requirement of banks and non-banks with quasi-banking functions by one percentage point to 20 percent from 19 percent starting June 24.

“The Monetary Board’s decision to raise the reserve requirement is a preemptive move to counter any additional inflationary pressures from excess liquidity. The move to raise the reserve requirement - which will apply to regular reserves - is also part of the normalization of the liquidity enhancing measures adopted during the global financial crisis,” Tetangco added.

The BSP slashed the reserve requirement for banks to 19 percent from 21 percent in November of 2008 as part of the package of liquidity-enhancing measures aimed at releasing more liquidity into the financial system to boost economic activity and cushion the impact of the global financial crisis on the domestic economy.