MANILA, May 1 , 2004 (STAR) By Des Ferriols  - The Bangko Sentral ng Pilipinas (BSP) said it will not ease the liquidity reserve requirements of banks unless the demand increases substantially enough to warrant the release of more funds into the system.

According to the BSP, the national inflation rate is expected to be benign and this would give the Monetary Board enough room to stay its policy rates but neither is there a need to ease the liquidity reserve requirements of banks.

BSP Deputy Governor Amando Tetangco Jr. said yesterday that any relaxation in monetary policy, including the adjustment in the LLR will have to be based on whether there is an increase in the demand for money.

"Right now, we donít see this increase," Tetangco said. "Although there was growth in certain economic sectors, we did not see it in the credit-intensive sectors."

Although the MB has not touched interest rates since March last year, its last action was to increase the LLR last February, taking the air out of the speculative attacks that sent the peso to record lows early in the year.

The MB raised liquidity reserve requirements of banks from eight percent to 10 percent, a two-point increase that immediately took out at least P30 billion from the market.

"The increase in the liquidity reserve requirements (LRR) of universal banks and commercial banks was preemptive and intended mainly to mop up the money that is sloshing around in the system and would otherwise find its way into the foreign exchange market," Tetangco explained.

The peso has stabilized since then but Tetangco said the MB will not touch the reserve requirements until there is a substantial change in the demand for money.

"When growth happens in credit intensive sectors, then the MB will see to it that there is enough liquidity to meet demand," he said. "One measure that will be looked at is the level reserve requirement."

"The idea is to ensure that there is no new money being released into the system unnecessarily," Tetangco added.

For 2004, the BSP expects inflation to be around 4.1 to 4.2 percent, against the target of four to five percent for the whole year.

Tetangco explained that keeping the LLR at present levels means bank will be required to park 19 percent of all their funds at the BSP.

Under BSP rules, banks are required to set aside nine percent of all their funds as statutory reserves. Aside from this, they are also required to set aside a certain amount that they could invest in government securities, called the liquidity reserve requirement (LRR).

The LRR is applicable to all forms of deposits Ė savings, time deposit and deposit substitutes of universal banks and commercial banks as well as peso-denominated common trust funds (CTF) and other fiduciary activities.

The BSPís move means that for every P1 deposit, banks are required to set aside a total of 19 centavos. The first nine centavos represent the statutory reserves and the next 10 centavos could be invested in Treasury bills and other qualified instruments.

Reported by: Sol Jose Vanzi

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