Hikes in bank reserve requirement seen in ’13

INCREASES in the reserve requirement on banks are possible following the central bank’s move last Thursday to keep such ratios and policy interest rates steady, according to the DBS Group.

The financial services provider said in a research note that such increases would be needed to mop up excess liquidity in the domestic market.

Increasing the reserve requirement means banks have less funds to lend out and, thus, affects interest rates and borrowing activities.

Universal and commercial banks are required to maintain cash reserves equivalent to 18 percent of demand deposits, savings deposits and time deposits.

The required ratio for thrift banks is 6 percent for all three types of deposits. For rural banks and cooperative banks, the mandate is 4 percent for demand deposits and savings deposits and 2 percent for time deposits.

As for the Bangko Sentral ng Pilipinas’ decision to keep policy rates unchanged, DBS said this “comes as no surprise as inflows have been the key challenge facing the BSP over the past several quarters and the resulting strength in the peso has eroded competitiveness.”

Even then, the bank noted that the BSP has taken a number of other measures to cope with strong inflows, which pose risks of an excessive credit boom aside from a continued appreciation of the local currency.

The Singapore-based bank noted that last Thursday, interest rates on the BSP’s special deposit accounts were slashed by 50 to 60 basis points across all tenors.

The recent SDA rate cuts were “significantly more aggressive than the cuts applied last year,” DBS said. “Despite these measures, we think that inflows will remain a challenge.”

Earlier this week, DBS said the BSP might introduce more administrative measures rather than changes in policy rates.

The overnight borrowing rate is currently at 3.5 percent while the overnight lending rate is at 5.5 percent.

DBS expected the BSP to maintain such rates as the country continued to benefit from positive economic developments.

“The economy is enjoying the sweet spot of high growth and low inflation and this situation is set to continue in the coming quarters,” DBS said.