HSBC: BSP likely to up reserve requirement anew to manage liquidity

Higher reserve requirements are likely to happen in the months ahead because of the "extraordinary situation" of high foreign capital inflows, according to a top treasury executive of Hongkong and Shanghai Banking Corp. (HSBC).

"The cheapest way for the Bangko Sentral ng Pilipinas to manage excess liquidity is to increase the reserve requirement to encourage growth," HSBC head of treasury operations Arnulfo Veloso said in a news conference Tuesday.

Veloso said the BSP may be reluctant to raise its overnight borrowing rate beyond 4.5 percent because higher interest rates would encourage even more foreign capital to flow in, increase liquidity and heighten inflation pressures.

The BSP Monetary Board raised the reserve requirement by two percentage points to 21 percent from 19 percent. The move, which will take effect this Friday, will keep some P70 billion out of the financial system.

Veloso explained that other monetary tools available to the BSP, like the special deposit accounts, will entail interest costs.

"Why pay for something that you can also get for free?" Veloso said.

HSBC forecast inflation rising to the higher range of the BSP target of 3 to 5 percent.

"Despite an expected economic slowdown, inflation is set to accelerate in the coming months fuelled by food and energy, staying above the central bank's target band of 3 to 5 percent in the second half and peaking in the fourth quarter," HSBC said. - ELR/VS, GMANews