Philippines Raises Reserve Ratio as Rate Increase Seen Nearing

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

Bangko Sentral ng Pilipinas raised the reserve requirement to 19 percent from 18 percent for universal and commercial banks effective April 4, it said in a statement in Manila today. It kept the rate it pays lenders for overnight deposits at a record-low 3.5 percent, as forecast by 13 of 16 economists surveyed by Bloomberg, with three expecting 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 yesterday. Today’s decision to raise the reserve requirement is to guard against potential risks that could come from rapid credit expansion, Governor Amando Tetangco said.

“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 the 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.

Inflation Forecast

Money-supply growth has exceeded 30 percent every month from July through January, and 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. Liquidity growth may stabilize by the second half of the year, with growth slowing to between 15 percent and 17 percent, he said.

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 today 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 special deposit accounts 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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