BSP open to policy rate adjustments
Friday, 27 January 2012 00:00
THE Bangko Sentral ng Pilipinas (BSP) is willing to adjust policy rates to address yield curve and in turn encourage more investments even as the inflation rate is expected to rise due to geopolitical concerns overseas. BSP Governor Amando Tetangco Jr. told reporters that "while waiting for the impact of the accelerated spending by government, what we need would be some adjustment in policy to anchor the yield curve lower so that businesses would have more incentives to undertake longer term investments." "I think we can be accommodative at this time given the manageable inflation outlook and the uncertainties surrounding the debt crisis in Europe," he said. Central bank's policy-making Monetary Board (MB) will have its first policy meeting on Thursday and analysts expect monetary officials to implement a rate cut since inflation remains on the decline and liquidity remains high. Central bank's overnight borrowing rate is currently at 4.5 percent while the overnight borrowing rate is at 6.5 percent. Both rates were kept steady for six consecutive policy meetings last year on account of manageable inflation outlook and deceleration in the rate of price increases at the latter part of 2011. Tetangco said any adjustments in the policy rates "is expected to lead to enhanced confidence not only among investors but also among consumers as they see that the necessary steps are being addressed." There are projections that if monetary officials will not touch the policy rates, there is a possibility that it will adjust banks' reserve requirement.
To date, the BSP is in the process of consultations with the banks regarding the changes in the RR policy. Tetangco said "these (ongoing consultations) should not be confused with direct cut in the RR." "Any adjustments in the RR that will come out of this meeting would essentially be intended to make the impact neutral. At this point in time, we believe that we have enough liquidity in the system," he added. Monetary officials are currently reviewing possible changes in the reserve requirement policy to enable them to "better handle" liquidity supply in the system as well as simplify monitoring of banks' RR compliance. Earlier, Tetangco said the review "is aimed at operationally strengthening the reserve requirement as a liquidity management tool." "The BSP will ensure that, on balance, its policy actions will continue to safeguard price stability and, at the same time, support domestic economic activity as deemed appropriate," he said. The central bank defines RR as the "percentage of bank deposits and deposit substitute liabilities that banks must keep on hand or in deposits with the BSP and therefore may not lend."
It cited that "changes in reserve requirements have a significant effect on money supply in the banking system, making them a powerful means of liquidity management." RR has two forms, namely regular or statutory reserves and liquidity reserves. The central bank said banks can place up to 40 percent of the regular reserve requirements and these are "paid interest of four percent per annum, while liquidity reserves are paid the rate on comparable government securities less half a percentage point." To date, bank's reserve requirement is at 21 percent, hiked by two percentage points last June and July after the same level of cut in November 2008. This was increased to the pre-crisis level, instead of hiking central bank's policy rate, after monetary officials noted that current policy settings remain appropriate and need not be changed. PNA
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