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Philippines Raises Reserve Ratio, Keeps Key Rate Unchanged

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May 8 (Bloomberg) -- The Philippine central bank ordered lenders to set aside more money as reserves a second time this year to curb liquidity and price pressure, while holding the benchmark rate for a 12th meeting.

Bangko Sentral ng Pilipinas raised the reserve requirement ratio for universal and commercial banks by one percentage point to 20 percent effective May 30, it said in Manila today, as predicted by eight of nine economists in a Bloomberg News survey. It kept the rate it pays lenders for overnight deposits at a record-low 3.5 percent, as forecast by 19 of 21 economists.

The central bank said inflation risks “lean toward the upside,” as it raised its forecasts for this year and next, citing higher prices of food, transport and power. The need for accommodative policy has waned and the Philippines needs measures to absorb liquidity and prevent stretched asset valuation, the International Monetary Fund said in March.

“The upward revision in the inflation views and the fact that BSP sees upside risks to these forecasts suggest that its next step may be to touch the policy rate, probably within the next couple of meetings,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “The central bank will probably raise the overnight borrowing rate before inflation gets close to 5 percent.”

The peso rose 0.1 percent before the decision to close at 44.185 per dollar. The benchmark stock index climbed 0.3 percent and has advanced about 15 percent this year, among the biggest gainers in Asia, buoyed by the longest stretch of inflows into Philippine equities since at least 1999.

Forecasts Raised

Consumer prices rose 4.1 percent in April from a year earlier, quickening from a 3.9 percent gain in March. The central bank today said drier weather poses risks as it raised its forecast for 2014 to 4.3 percent from 4.2 percent and its estimate for 2015 to 3.4 percent from 3.2 percent.

President Benigno Aquino is increasing spending to a record this year to lure investments and boost expansion to as much as 7.5 percent after a 7.2 percent gain last year. Builder Ayala Land Inc., brandy maker Emperador Inc. and cement producer Holcim Philippines Inc. are among companies that reported higher profits last quarter on rising demand.

Governor Amando Tetangco last month said interest rates may not be the best tool to curb surging money supply. A strong economy gave the monetary authority room to raise the reserve requirement ratio, he said today, adding that the move is to curb financial-stability risks.

Indonesia earlier held its borrowing costs as predicted in a Bloomberg survey. Malaysia will also hold its benchmark rate today, according to analysts.

Stress Test

Bangko Sentral is firming up steps to avert a property bubble, including requiring banks to undergo a stress test to gauge their ability to withstand losses in their property exposure, Deputy Governor Nestor Espenilla said earlier today.

The central bank sees no evidence of stretched property valuations, with property prices “way below” the levels in 1997-1998, Deputy Governor Diwa Guinigundo said at a briefing after the rate decision today. The increase in the reserve ratio will siphon off an estimated 60 billion pesos from the financial system, Guinigundo said.

It is difficult to characterize the policy bias at this point, and the monetary authority can consider other prudential tools if needed, Guinigundo said.

The Philippine central bank last year cut the rate on SDAs three times and restricted access to the funds as the BSP shifted toward an interest-rate corridor approach. Money-supply growth exceeded 30 percent every month in the nine months through March. The pace is expected to slow to 15 percent to 17 percent by mid-year, Guinigundo reiterated today.

Today’s move “is in line with the central bank’s reluctance to tweak policy rates that could fuel financial stability pressures,” Australia and New Zealand Banking Group Ltd. analysts Eugenia Fabon Victorino and Glenn Maguire said in a note. “We expect further tightening as the central bank remains cautious of persistently high growth in domestic liquidity.”

To contact the reporters on this story: Karl Lester M. Yap in Manila at kyap5@bloomberg.net; Max Estayo in Manila at mestayo@bloomberg.net

To contact the editors responsible for this story: Stephanie Phang at sphang@bloomberg.net Rina Chandran, Clarissa Batino

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