BSP Gov. Rafael B. Buenaventura announced today that the Monetary Board approved two measures to moderate liquidity and ease pressure on the peso. First is the increase by two (2) percentage points in the liquidity reserve requirement on deposits and deposit substitute liabilities, common trust funds and trust and other fiduciary liabilities of commercial banks and non-banks with quasi-banking functions (NBQBs). The increase will take effect on Friday, 27 July 2001. The second measure is the reduction in the amount of over-the-counter (OTC) sales of foreign exchange to residents without documentary requirements from US$10,000 to US$5,000.
The liquidity reserves for commercial banks and NBQBs will then be at 9 percent, up from the present 7 percent. Meanwhile, the regular reserve requirement will be maintained at the current level of 9 percent.
The Monetary Board expects that the increase in liquidity reserves should not lead to higher bank lending rates since a one-percentage point increase in liquidity reserves is estimated to raise intermediation cost by only 1/40 of one percent. Thus, there is no justification for an increase in bank lending rates. The nominal change in the intermediation cost is the main reason why the Board resorted to an increase in the liquidity reserve rather than in the regular reserve because of its minimal impact on the cost of borrowing.
The 2-percentage increase in liquidity reserves, however, shall not apply to thrift banks and rural banks so as not to restrain lending to small and medium enterprises and the housing and agricultural sectors.
The 2-percentage point increase in reserves will mop up an estimated P27.4 billion. The growth of domestic liquidity accelerated in May. Nevertheless, bank lending and investments in domestic securities slowed down as peso liquidity moved into investments in foreign assets. The higher liquidity reserve requirement is expected to moderate future liquidity growth, which would mitigate inflation and inflationary expectations. This move will also ease the pressure on the peso coming from excess peso liquidity. Greater stability in exchange rate will in turn reduce the upside risks to the inflation outlook.
Buenaventura emphasized that the reduction from US$10,000 to US$5,000 in OTC sales is not a form of foreign exchange control. Those with legitimate needs of foreign exchange for expenses like travel, medical and other requirements can still purchase more than US$5,000 with proper supporting documents. The new ceiling for undocumented purchases is intended to prevent abuse through the splitting of foreign exchange sales resorted to by banks and FOREX corporations to circumvent the current ceiling.