BSP hikes reserve requirement for banks

MANILA, Philippines – The central bank on Thursday, May 8 left its key interest rates unchanged, but raised banks’ reserve requirement amid rising inflation.

The Bangko Sentral ng Pilipinas (BSP) kept its overnight borrowing and lending rates at record lows of 3.5% and 5.5%, respectively.

It also kept the rate on its short-term special deposit account the same, but raised banks’ reserve requirement ratio by one percentage point, effective May 30.

“The Monetary Board’s decision is based on its assessment that current monetary policy settings continue to be appropriate given a manageable inflation environment,” BSP Governor Amando Tetangco Jr. said in a statement.

However, Tetangco said that “risks to inflation outlook continue to lean toward the upside, with potential price pressures emanating from the possible uptick in food prices as a result of expected drier weather conditions, as well as pending petitions for adjustments in transport fares and power rates.”

The reserve requirement refers to the proportion of banks’ deposits that they are required to hold as reserves. Raising this requirement forces banks to withhold a larger portion of their funds, restricting lending.

Lending fuels business and household spending, stirring the economy. Higher spending pushes consumer prices up.

BSP rates, meanwhile, are banks’ benchmark in charging their loans. Low rates make loans cheap, encouraging consumers to borrow.

Some analysts had expected the central bank to first raise the reserve requirement before touching interest rates this year.

Inflation sped up to 4.1% in April from 3.9% in March due to higher food and utility prices.

The 4-month average also stood at 4.1%, still within BSP’s target of 3% to 5%. – Rappler.com