BSP says banks passed on interest rate cuts, reserve requirements to stay

BANKS have cut further their lending rates after a series of reductions in the Bangko Sentral ng Pilipinas’ (BSP) interest rates, an official said.

“We brought down the [policy] rates by 200 basis points. How much is their pass through, 100 basis points,” the official said, referring to the country’s lenders.

The overnight borrowing rate now stands at a record low of 4 percent while the overnight lending, 6 percent.

Earlier, another official said banks cannot lower their primary rates because of the rising risk premium brought about by market concern on the government’s under-spending.

The Manila Times had reported that key agencies tasked to frontload the productive portions of their allocation failed to hit the 60-percent minimum ordered by President Gloria Arroyo.

Despite double-digit growth in spending in the first half of this year, government expenditures still failed to hit the target, with lower-than-expected revenues causing the budget deficit to balloon by 752 percent for the period.

BSP data showed bank-lending rates ranged from 7 percent to 9 percent as of July 6.

Bank lending slowed to 10 percent in May from 13.4 percent in April as lenders continue to tighten credit standards even as the demand for loans dipped. In contrast, domestic liquidity, or M3 picked up by 15 percent in May from 13.7 percent in April.

The official added that the BSP is unlikely to cut its reserve requirements, as the economy has no additional absorptive capacity for higher liquidity.

“Yes, I think we have enough liquidity. Bringing down the rates of reserve requirements will simply release more peso in the system, because the economy is still recovering and there’s no additional absorptive capacity. It will be self-defeating. The additional liquidity will just result to higher inflation,” the official said.

In November last year, the BSP cut its reserve requirements for banks to 19 percent from 21 percent. The reduction is aimed at letting loose more money into the domestic financial system and mitigate the impact of a global credit crunch. This released about P60 billion of required reserves into the banking system.

“Reserve requirements look high at 19 percent but it’s not. Liquidity reserve allows the banks to earn interest from those instruments in market rates. It will come down when the economy normalized and low inflation,” the official said.

“Over time, the economy when its growing will need more liquidity and in due time we will able to bring down the reserve requirement,” the official added.–Maricel E. Burgonio, Manila Times