BSP eyes further cut in reserve requirement on banks

The Bangko Sentral ng Pilipinas is considering reducing further the reserve requirement imposed on banks to temper the peso’s appreciation and bring relief to the troubled export sector.

Francisco Dakila Jr., director of the BSP’s monetary and financial policy unit, said the adjustment of the reserve requirement would allow the BSP to address any threat to the country’s financial and economic stability.

“The reserve requirement is a potent tool [to minimize risks to stability],” Dakila said Monday in a forum on the exchange rate organized by the Management Association of the Philippines.

The reserve requirement is the portion of deposits that banks are required to keep with the central bank as reserve. A cut in the requirement will increase the supply of pesos circulating in the economy, making the local currency cheaper.

It will also allow banks to use more of their funds for lending to support investments. Higher investments, in turn, may push demand for imported raw materials and capital goods, increasing demand for dollars. As a consequence, the peso will depreciate.

In April last year, the reserve requirement was cut from 21 to 18 percent. Simultaneously, the BSP also stopped paying interest on the reserves that banks had parked with the BSP.

BSP Governor Amando Tetangco Jr. on Tuesday told reporters that the central bank was reviewing its policy tools to address challenges that the economy was facing.

The country’s export sector has been complaining about the strengthening of the peso, which was one of the fastest-appreciating currencies in Asia last year.

Exporters claim that a stronger peso has made Philippine goods more expensive and less attractive to foreigners.

According to the International Monetary Fund (IMF), the peso’s real effective exchange rate—or the local currency’s exchange rate adjusted for inflation—has been rising since 2003.

Shanaka Peiris, the IMF’s Philippine representative, said during the forum that the appreciation of the peso was largely due to the huge inflow of remittances.

The IMF supports the foreign exchange policy of the BSP, Peiris said, which was to allow market forces to determine the peso value.

The central bank intervenes only when risks of excessive volatility become significant.

The substantial appreciation of the peso has been costly for the BSP. In the first 11 months of 2012, the central bank incurred about P86 billion in losses because of its huge dollar purchases.

Market players said that, if not for the BSP’s intervention, the peso could have been stronger. Still, exporters want the BSP to be more aggressive in reining in the peso’s appreciation.