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BSP tightens monetary policy to boost peso |
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(06 February 2004, Friday - The Philippine Star)
By Des Ferriols Monetary officials moved swiftly yesterday to tighten monetary policy by siphoning off cash from the banking system as consumer prices surged against the backdrop of a freefalling peso. |
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In a surprise move, the Bangko Sentral ng Pilipinas (BSP) said it is raising the liquidity reserve requirement of commercial banks by two percentage points, from eight percent to 10 percent, a step that officials said would take some P30 billion out of the banking system.
"This is intended to address potential inflationary pressures due to foreign exchange volatility," BSP Deputy Governor Amando Tetangco said yesterday. The peso rallied sharply moments after the BSP move in mid-afternoon, strengthening to 55.850 to the dollar after having traded at 56 to $1 in the morning. At the close of trading at the Philippine Dealing System (PDS), the peso regained 26 centavos to settle at 55.900 from Wednesday’s close of 56.160 to $1. Total volume traded amounted to $166.50 million on an average rate of 56.004 to $1. Dealers cautioned, however, that this reaction could be temporary as importers and other corporations are 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 local bank dealer said. The BSP said the monetary tightening measure is intended to address the inflationary impact of the peso’s recent weakness, which fell to a historic low of 56.22 on January 29 due to political concerns ahead of the May 10 presidential election. The BSP’s decision also came in the wake of warnings from Malcanang against dollar speculators. Under BSP rules, banks are required to set aside nine percent of their funds as statutory reserves on top of the 10 percent which the BSP now requires as liquidity reserve requirement. The liquidity reserve requirement is applicable to all forms of deposits– savings, time deposit and deposit substitutes of universal banks and commercial banks as well as peso-denominated common trust funds (CTF) and other fiduciary activities. The BSP’s move means that for every P1 deposit, banks are required to set aside a total of 19 centavos. The first nine centavos represent the statutory reserves and the next 10 centavos could be invested in Treasury bills and other qualified instruments. "The net effect is that we will be taking out excess liquidity from the market," Tetangco said. "But this shouldn’t have an impact on the intermediation cost or lending rates of banks." Earlier yesterday, the government announced that consumer prices had risen by a higher than expected 3.4 percent in January. 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 that 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 a three percent inflation for January, while Buenaventura forecast that the index would rise by between 3.2 percent and 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 will also likely result in inflationary pressures. home | latest news |
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