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. The bank raised the reserve requirement to 19 per cent from 18 per cent for universal and commercial banks effective April 4, it said in a statement in Manila on Thursday. It kept the rate it pays lenders for overnight deposits at a record-low 3.5 per cent, as forecast by 13 of 16 economists surveyed by Bloomberg, with three expecting an increase of a quarter of a per centage 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. Thursday'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-thanexpected move of raising the reserve ratio by a per centage point, which means tightening has begun," said Euben Paracuelles, a Singapore-based economist at Nomura Holdings. "More policy action will come," he said, adding that the benchmark may be raised by one per centage point in the second half of the year.

The peso slipped 0.1 per cent to 45.038 per dollar at the close before the decision. It has weakened more than nine per cent against the US dollar in the past 12 months, among the worst performers in Asia. The benchmark stock index fell 0.5 per cent at the close ahead of the announcement.

Money-supply growth has exceeded 30 per cent 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 stabilise by the second half of the year, with growth slowing to between 15 per cent and 17 per cent, 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 per cent.