March 28, 2014

BSP maintains policy rate, adjusts reserve requirement

The Bangko Sentral ng Pilipinas (BSP) yesterday kept its policy rate steady at 3.5%. Moreover, the regulator also kept SDA rates unchanged. However, the BSP raised the reserve requirement ratio for banks by 100bps to 19.0%. The regulator, in its press release, stated that it expects inflation to stay within targets (4 +/- 1% for 2014 and 3 +/- 1% for 2015).

Despite this, the balance of the inflation outlook continues to be skewed to the upside. The regulator expects inflation pressures to arise from pending adjustments in utility rates and possible increases in food and oil prices. The BSP said that raising the reserve requirement ratio is aimed at safeguarding against potential risks that could arise from excess liquidity growth and rapid credit expansion.

Our take: We believe that BSP’s recent hawkish stance is warranted, considering the uptick in inflation and other developments globally. We also find it positive that the regulator is making the transition from monetary easing to tightening as smooth and gradual as possible.

This bodes well for local banks that still have to implement changes in their strategies, and buys them time to further prepare their balance sheets for rising interest rates. Moving forward, we expect the regulator to gradually tighten monetary policy conditions to control excess liquidity in the system before tightening its policy rates. – WealthSec