BSP seen raising bank reserve requirement anew

The Bangko Sentral ng Pilipinas may be poised to raise the reserve requirement for banks by another percentage point this year as the excess cash in the system remains significant even with the initial increase implemented last week.

This was according to Credit Suisse, which projected that the BSP might find it prudent to increase the reserve requirement some more to combat remaining inflationary pressures arising from excess liquidity in the economy.

Following last week’s one-percentage-point adjustment, the reserve requirement now stands at 20 percent. This means a bank has to keep with the BSP P20 for every P100 of deposits it generates. A higher reserve requirement reduces the amount of money that banks may use for lending to consumers and businesses.

The increase in the reserve requirement is meant to temper inflation as officials said the excess cash in the system was substantially pushing demand and, in the process, prices of goods and services.

Latest government data showed that inflation, which measures the annual rate of increase in consumer prices, averaged 4.5 percent in May and 4.2 percent in the first five months of this year. The figures were an acceleration from the 3.8 percent recorded in 2010.

Prior to last week’s increase in the reserve requirement, the last time the BSP changed the rate was in 2008 when it was reduced to 19 percent from 21 percent. The cut was meant to inject more money into the economy to help avoid a recession given the global crisis during that time.

Credit Suisse said the BSP was likely to bring back the reserve requirement to 21 percent this year.

The investment bank said that the move of the BSP to raise the reserve requirement last week was anticipated, citing hints made earlier by central bank officials and the apparent need for liquidity-mopping measures. Credit Suisse opined that the increase in the reserve requirement was actually delayed.

“What we found surprising, however, is why the BSP has taken so long to mop up some of the excess liquidity,” the investment bank said.

Besides raising the reserve requirement, the BSP has also increased its key policy rates by a total of 50 basis points so far this year.

The BSP’s policy rates now stand at 4.5 percent and 6.5 percent for overnight borrowing and lending, respectively, following the rate increases earlier this year. Overnight borrowing is the amount paid by the BSP for overnight deposits placed by banks, while overnight lending is the amount charged by the BSP for overnight loans it extends to banks.

These policy rates influence the interest rates charged by banks on their own clients, thus affecting demand for loans and appetite for savings. Loans and savings, in turn, affect how prices behave.

Credit Suisse said that on top of the likely additional increase in the reserve requirement, another 50-basis-point raise in the policy rates was expected to be implemented by the BSP before the year ends.