Philippines to weaken surging peso

Banks to cut reserve requirement to boost lending. Sources said the Bangko Sentral ng Pilipinas, the central bank, is considering another reduction in the reserve requirement imposed on banks to halt the peso’s unabated rise in value.

A cut in the requirement will increase the supply of pesos circulating in the economy, making the peso cheaper against other currencies. The bank said the adjustment of the reserve requirement will allow it to address threats to the country’s financial and economic stability.

A reduction will also allow banks to lend more, thereby supporting investments.

Higher investments will increase demand for imported raw materials and capital goods, boosting demand for dollars. The peso will depreciate as a consequence. In April 2012, BSP cut the reserve requirement from 21% to 18%.

It also stopped paying interest on the reserves that banks had parked with the BSP. The International Monetary Fund said the peso’s real effective exchange rate (or the exchange rate adjusted for inflation) has been rising since 2003.

The significant appreciation of the peso has been costly for the BSP. In the first 11 months of 2012, the central bank lost P86 billion because of its huge dollar purchases. Analysts said the peso would be stronger today without previous BSP interventions.