BSP hikes bank-deposit reserves to 20 percent

The Bangko Sentral ng Pilipinas (BSP) moved to quash latent inflation on Thursday by tweaking banks’ deposit reserves a notch higher to 20 percent, instead of tightening the screws on interest rates, as some had expected, and achieve the same result.

The higher deposit reserve effectively denied banks access to some P60 billion worth of funds they may not now lend but should instead warehouse in the vaults of the BSP, where their influence on inflation may no longer count.

The decision highlights the central bank’s unwillingness to wield a policy instrument as blunt as the rate at which it borrows from or lends to banks, which remain at 3.5 percent and 5.5 percent, respectively. Appropriately adjusting the BSP policy rates would have made the cost of money more expensive and life more difficult for both businesses and households to access funds as domestic interest rates move up.

The decision should also have minimal impact on bank lending, in general, as even the banks acknowledge that P60 billion off their collective loan book represents just a drop in the bucket of loan funds aggregating P3.86 trillion, as of latest.

First Metro Investment Corp.’s Rey B. Montalbo Jr., senior vice president and group head for financial markets at the premier investment banking outfit in the country, for instance, said the Monetary Board (MB) decision sends the signal that while inflation pressures have forced the BSP to act in a preemptive manner, they did so without disrupting the potential for the economy to expand over the next 18 to 24 months down the line.

“Making P60 billion inaccessible is just a drop in the bucket. Bank-lending rates should not be affected at all because the financial system remains very liquid. Loan rates should stay the same,” Montalbo said.

In the past, changes in the policy rates of the BSP directly impacted on inflation, as the levers are moved up or down the policy scale, appropriately impacting on the country’s output measured as its gross domestic product. 

But at its monetary-policy meeting on Thursday, the MB decided to keep its policy rates at record lows but raised banks’ RRR  by another 100 basis points, or 1 percentage point. The decision, according to BSP Governor Amando M. Tetangco Jr., soaked on some of the potentially inflationary liquidity in the system.

“The adjustments in the reserve requirements are expected to help mitigate potential risks to financial stability that could arise from the strong growth in domestic liquidity. The Monetary Board believes that solid domestic economic activity provides room for the hike in reserve requirements,” Tetangco said at the post-policy meeting news briefing.

This was the BSP’s second deposit-reserve adjustment this year; the first was implemented on March 27, when some P60 billion was initially held hostage in the vaults of the central bank.

The RRR—or the percentage of bank deposits that must be kept within the BSP’s vaults as reserves—now stands at 20 percent for universal and commercial banks, up from the 19 percent decision on March 27.

Thrift banks’ RRR is now at 8 percent, from the previous month’s 7 percent.

Rural banks’ and cooperative banks’ reserve requirement, meanwhile, is not covered by the tightening measure and, as such, their reserve requirements will remain at 5 percent.

Key policy rates, meanwhile, remain at 3.5 percent for the overnight borrowing or reverse repurchase facility, and 5.5 percent for the overnight lending, or repurchase facility.  This has been on all-time low rates since October 2012. The special deposit account rate was, likewise, retained at 2 percent.

Tetangco said in his earlier speaking engagements that a hike in policy rates “may not be the appropriate tool” in managing the current liquidity and inflation dynamics.

“The Monetary Board’s decision is based on its assessment that current monetary-policy settings continue to be appropriate given a manageable inflation environment,” Tetangco said.

Money-supply growth has been growing at a pace of 34.8 percent as of March this year, fueled mostly by bank lending, which also grew at a double-digit pace of 20 percent during the period.

 BSP Deputy Governor for the Monetary Stability Sector Diwa C. Guinigundo said the tightening move should be enough for domestic liquidity growth to normalize back to 15 percent  to 17 percent within the year.

 “We expect that the growth of M3 will continue with its path by the middle of this year, and it will be closely approximate to a 15-percent to 17-percent growth—which would represent the normal trend in the trajectory of total domestic liquidity,” Guinigundo said.

 Despite the manageable inflation assessment, the BSP said it will continue to watch the risks in the liquidity conditions in the country, and expressed readiness to tweak policy measures, if deemed necessary.  “The BSP will continue to pay close attention to the outlook for inflation and growth to ensure that monetary-policy settings remain consistent with price and financial stability,” Tetangco said. “The BSP also remains prepared to implement policy actions as needed to prevent a potential buildup in inflation expectations and financial imbalances.”

source:  Business Mirror