BSP raises bank reserve requirement

The Bangko Sentral ng Pilipinas on Thursday raised the reserve requirement for banks and quasi-banks by another percentage point, citing the need to curb inflationary pressures stemming from inflows of foreign hot money.

The move brings the reserve requirement, the proportion of deposits that banks and quasi-banks must keep with the BSP as reserves, at 21 percent, back to where it was prior to the latest global financial and economic crisis.

The one-percentage-point increase in the reserve requirement follows a similar move made by the BSP in June.

BSP Deputy Governor Juan de Zuñiga, officer in charge of the central bank while Governor Amando Tetangco Jr. is out of the country, said in a briefing that expectations that foreign capital inflows would rise further in the months ahead prompted the central bank to raise the reserve requirement.

“The Monetary Board [of the central bank] is of the view that sustained foreign exchange inflows, driven by upbeat market sentiment over the brighter prospects for the Philippine economy, could fuel a further acceleration of domestic liquidity growth that could pose risks to future inflation,” De Zuñiga said.

In the same briefing, BSP Assistant Governor Ma. Cyd Tuaño-Amador explained that raising the reserve requirement was the preferred move over raising the key policy rate to curb inflationary pressures.

Ms. Amador said that when price pressures were created by rising foreign portfolio investments, it was impractical to raise interest rates because such a move could lead to an increase in yields of financial instruments, thereby attracting more foreign portfolio investments.

The increase in the reserve requirement, meantime, does not have the same adverse consequence. A higher reserve requirement simply reduces the amount of available cash that banks may lend, thereby tempering future growth of loans that, in turn, help temper a rise in inflation-inducing consumption.

Amador said the slow growth rates in industrialized economies and the fast growth rates in emerging markets in Asia like the Philippines were attracting more foreign investments in stocks, bonds and other securities in the latter.

While the surge in foreign capital inflows indicated the confidence of investors, these were normally less favored compared with foreign direct investments because foreign portfolio investments, in huge amounts, only cause volatility in the exchange rate without resulting in substantial job-generating investments.

Besides increasing the reserve requirement twice this year, the BSP likewise raised the key policy rates twice earlier this year.