Philippines cuts bank reserve ratio, could add pressure on peso

MANILA: The Philippine central bank on Thursday cut the reserve requirement ratio for banks for the second time this year, a move that could put more pressure on a peso that has slumped to a 12-year low.

The cut is expected to add around 100 billion pesos ($1.90 billion) in liquidity to the financial system, which could stoke demand-side price pressures at a time when inflation is running at a five-year peak, analysts said.

The central bank said it was reducing the amount of reserves banks need to park with the monetary authority by 1 percentage point to 18 percent, effective June 1.

But it was quick to say the move was not meant to signal any change in monetary policy stance.

It was not clear if the central bank made a cut now to maintain comfortable peso liquidity, at a time when some emerging Asian countries are seeing capital outflows because of high US bond yields.

For a long time, the Bangko Sentral ng Pilipinas (BSP) has flagged a gradual reduction in its reserve requirement ratio (RRR) from 20 percent, one of the highest in Asia, to a single digit as it cuts reliance on this tool to manage liquidity.

This is in keeping with its policy stance over the past year of encouraging more credit and investment growth.

The market had "partly anticipated" Thursday's cut "and this is likely to partly explain the peso's recent underperformance," said Joey Cuyegkeng, economist at ING Bank in Manila. "The market takes this for now as a liquidity infusion which is seen to ease short-term rates."

Thursday's cut followed a 1 percentage point reduction in March, which the central bank has said was part of part of its shift towards a more market-based implementation of policy.

Jiaxin Lu, analyst at Continuum Economics in Singapore, said that as extra liquidity is injected, "this is likely to put further downward pressure on the peso, may further fuel inflationary pressures as well."

The Philippines' fiscal and monetary policy has been loose for a while, leading to higher credit and loan growth. But bond yields and market interest rates had edged up this year alongside a rise in inflation. In April, the annual rate was 4.5 percent, the highest in at least five years.

On May 10, the central bank raised its benchmark interest rate by 25 basis points to 3.25 percent, the first in more than three years, to contain price pressures and manage inflation expectations.