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Central bank tightens policy to stem peso weakness |
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(05 February 2004, Thursday - Philippine Daily Inquirer)
THE CENTRAL BANK moved swiftly Thursday to tighten monetary policy by siphoning off cash from the banking system as consumer prices surged against the backdrop of a weak local currency. |
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In a surprise move, the Bangko Sentral ng Pilipinas (BSP) said it was raising the liquidity reserve requirement of commercial banks by two percentage points to 10 percent, which officials said would take some 30 billion pesos out of the banking system.
"This is intended to address potential inflationary pressures due to foreign exchange volatility," Bangko Sentral ng Pilipinas (BSP) Deputy Governor Amando Tetangco Jr. said. He said the reserve hike would siphon off some 30 billion pesos from the banking system. He said increasing the reserve requirement would not weigh on the economy compared with raising interest rates. "It should not impact on growth at all," he said. "Members of the (central bank's) Monetary Board decided to take action because of the economic impact of the peso's weakness." Following the liquidity reserve hike, the overall reserve requirement imposed on banks is now 19 percent, from 17 percent previously, with the statutory reserves still at nine percent. This means that for every peso deposit placed in banks, 0.19 peso is set aside for reserve requirements and banks can use only 0.81 peso for lending. The peso rallied sharply moments after the central bank announced its move in mid-afternoon, rising to 55.85 to the dollar, having trading at up to 56.20 in the morning. It ended trading at 55.90 to the dollar, from a close of 56.16 Wednesday, with transactions totaling 166.5 million dollars. Dealers cautioned, however, that the policy reaction could be temporary as importers and other corporations were seen re-entering the foreign exchange market. "It's just a knee-jerk reaction. Once everything settles, we're likely see renewed (dollar) buying again," a bank dealer said. The BSP said the monetary tightening measure was intended to address the inflationary impact of the peso's recent weakness, which fell to an all-time low of 56.22 to the dollar during trading last Thursday mainly due to political concerns ahead of the May 10 presidential election. The government announced earlier Thursday that consumer prices rose by a higher-than-expected 4.1 percent in January from a year earlier. The rise in the consumer price index (CPI), along with the peso's weakness, had fanned fears of an impending interest rate increase. BSP Governor Rafael Buenaventura earlier said the monetary authorities would review the CPI data for January, "look at the outlook for the rest of the year" and then "act accordingly." Economic Planning Secretary Romulo Neri said reports of mad cow disease and bird flu overseas had exerted pressure on the prices of meat products, even affecting the price of fish as people switched their diets. Earlier, Neri had predicted an inflation rate of 3.0 percent for January, while Buenaventura forecast a range of 3.2-3.6 percent, mainly owing to higher fuel costs. The National Statistics Office (NSO) said the January figure was calculated using a new accounting base year for the first time. Under the old method, inflation was 3.1 percent in December, the lowest in a generation, as well as for the whole of 2003. The NSO started using the new method, based on prices in 2000 instead of 1994, last month to reflect changes in consumption patterns. Based on the old method, the January inflation would have been 3.4 percent. Neri said the inflation rate would be mainly affected by oil and meat prices and the foreign exchange rate in the coming months. Economists, on the other hand, said increased election-related spending for the elections would also likely result in inflationary pressures. home | latest news |
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