Bid to ease reserves rule nixed
ADJUSTMENTS COULD LEAD TO
EXCESS LIQUIDITY, SAYS GUINIGUNDO

By Jun Vallecera
Reporter

THE Bangko Sentral ng Pilipinas ruled out adjustments to the current deposit reserve mix that some banks blame for the continued weak lending environment. At 21 percent, banks see the deposit reserve requirement as one more disincentive for them to lend more than they already do.
           
The 21 percent means banks must set aside 21 centavos in cash for every peso they lend. The banks claim a reduction in the reserve structure could push the industry to greater lending activities since a bigger portion of total deposits become available.
           
“We realize the effects of the reserve requirement but [adjustments] could lead to excessive liquidity at this point,” said deputy BSP Governor Diwa Guinigundo on Friday.
           
Latest data do not support, however, a reduction in the required reserve, according to Guinigundo. Peso liquidity, called M3 by central bankers, pushed forward by 16.1 percent in October, significantly higher than liquidity growth of only 14.5 percent in September.
           
In that same time frame, bank lending even grew a meager 3.2 percent, mostly because loans to the public sector accelerated by 3.8 percent, he added. Guinigundo said he would go as far as saying the BSP favors a rate cut at some point in the future but not now.
           
Domestic liquidity has been driven higher partly by copious fund inflows from foreign direct as well as portfolio investors in recent months, resulting in a surplus in the balance of payments that encouraged even more foreign inflows. These flows made the peso gain on the US dollar.
           
Guinigundo said unwarranted liquidity growth spurs inflation to act up as well, but has not in this case because “its impact is somewhat weaker relative to levels in the 1990s. This does not mean we are not concerned that liquidity growth is surging because that is precisely why we are monitoring it. But our outlook is for inflation and liquidity to remain benign and therefore within forecast this year.” 
           
Original inflation forecast this year was a range of 6.9 percent to 7.1 percent, although latest projections indicate the full-year average should be much lower.