Philippines Raises Bank Reserve Ratio in Step Toward Rate Rise

The Philippine central bank ordered lenders to set aside more money as reserves to curb liquidity, a move that analysts said may herald increases in the benchmark interest rate in coming months.

Bangko Sentral ng Pilipinas raised the reserve requirement to 19 percent from 18 percent of total deposits at universal and commercial banks effective April 4, it said in a statement in Manila yesterday. It kept the rate it pays lenders for overnight deposits at a record-low 3.5 percent, as estimated by 13 of 16 economists surveyed by Bloomberg, with three having expected an increase of a quarter of a percentage point.

The pressure for accommodative policy has waned and the Philippines needs measures to absorb liquidity and prevent stretched asset valuations, the International Monetary Fund said this week. The decision to raise the reserve requirement is to guard against potential risks that could come from rapid credit expansion, Governor Amando Tetangco said yesterday.

“The central bank guidance seems quite hawkish, even with the larger-than-expected move of raising the reserve ratio by a percentage point, which means tightening has begun,” said Euben Paracuelles, a Singapore-based economist at Nomura Holdings Inc. “More policy action will come,” he said, adding that the benchmark may be raised by 1 percentage point in the second half of the year.

The peso slipped 0.1 percent to 45.038 per dollar at yesterday’s close before the decision. It has weakened more than 9 percent against the U.S. dollar in the past 12 months, among the worst performers in Asia. The benchmark stock index fell 0.5 percent at the close ahead of the announcement.

‘Walk the Talk’

Money-supply growth has exceeded 30 percent every month from July through January. Tetangco earlier this month said the central bank’s scope to hold interest rates has narrowed, and that a preemptive move can be less disruptive.

The central bank expects to mop up 60 billion pesos ($1.3 billion) with the reserve requirement increase, Deputy Governor Diwa Guinigundo said at a briefing yesterday. Liquidity growth may stabilize by the second half of the year, with growth slowing to between 15 percent and 17 percent, he said.

“It remains to be seen whether the central bank will eventually walk the talk over the next few months and tighten monetary policy aggressively as per their recent hawkish comments,” Michael Wan, a Singapore-based economist at Credit Suisse Group AG, said in a note after the decision. “While we do not rule out some marginal changes to the special deposit account rate for instance, we think that meaningful moves by the BSP will likely only come in 2015, when the Fed is widely expected to hike rates.”

Inflation Forecast

President Benigno Aquino, in a February interview, said there is no danger of the economy overheating, and played down the risk of asset bubbles forming as he increases spending to a record this year to boost expansion to as much as 7.5 percent. San Miguel Corp., Ayala Corp. and Megawide Construction Corp. are among companies building schools, power plants and roads.

Consumer prices rose 4.1 percent from a year earlier last month, easing from a 4.2 percent gain in January which was the fastest pace in two years. The central bank yesterday lowered its 2014 inflation forecast to 4.2 percent from 4.3 percent and its estimate for next year to 3.2 percent from 3.3 percent. It held the rate on SDAs at 2 percent.

“As global interest rates normalize, the BSP will be keen to avoid excessive volatility in its financial markets,” said Krystal Tan, a Singapore-based economist at Capital Economics Ltd. “A key domestic concern is that continued low interest rates will further fuel credit growth and asset bubbles,” she said, adding that the first increase in the benchmark is likely to come within the next couple of months.

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