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BSP Removes Tiering on Bank Placements and Raises Liquidity Reserve Requirement

03.20.2003

In a special meeting yesterday, the Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas (BSP), decided to remove the three-tiered system for banks’ placements with the BSP and to increase the liquidity reserve requirement for universal banks and commercial banks by one percentage point. The overnight reverse repurchase (RRP) transactions with the BSP will be accepted at a flat rate of 7 percent. Term RRPs and special deposit accounts (SDAs) with the BSP will be paid the published rates for corresponding tenors, i.e., at a certain spread over the overnight RRP rate. The removal of the tiering system will be effective starting today, 20 March 2003. Meanwhile, the liquidity reserve requirement against peso demand, savings, time deposit and deposit substitute liabilities of universal banks (UBs) and commercial banks (KBs) will go up to 8.0 percent effective Friday, 21 March 2003.

The decision to remove the tiering scheme and raise the liquidity reserve requirement is intended as a preemptive response to inflationary risks. In assessing the inflation environment and overall macroeconomic conditions, the Monetary Board has expressed concern over the recent developments in the foreign exchange market. Monetary Board members are of the view that a sustained weakening of the peso poses risks to the inflation outlook. The Monetary Board believes that the risk of higher future inflation arising from exchange rate movements requires a policy response in order to limit the potential impact on consumer prices.

The BSP will continue to closely monitor developments in the foreign exchange market. The Monetary Board is prepared to take further policy action, if necessary, to ensure orderly market conditions which is important in pursuing the BSP’s primary objective of price stability.

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