Friday, July 29, 2011
Morning Brief: 29 July 2011
BSP raises bank reserve requirement Inflationary pressure seen from forex inflows By: Michelle V. Remo Philippine Daily Inquirer The Bangko Sentral ng Pilipinas on Thursday raised the reserve requirement for banks and quasi-banks by another percentage point, citing the need to curb inflationary pressures stemming from inflows of foreign hot money.The move brings the reserve requirement, the proportion of deposits that banks and quasi-banks must keep with the BSP as reserves, at 21 percent, back to where it was prior to the latest global financial and economic crisis. The one-percentage-point increase in the reserve requirement follows a similar move made by the BSP in June. BSP Deputy Governor Juan de Zuñiga, officer in charge of the central bank while Governor Amando Tetangco Jr. is out of the country, said in a briefing that expectations that foreign capital inflows would rise further in the months ahead prompted the central bank to raise the reserve requirement. “The Monetary Board [of the central bank] is of the view that sustained foreign exchange inflows, driven by upbeat market sentiment over the brighter prospects for the Philippine economy, could fuel a further acceleration of domestic liquidity growth that could pose risks to future inflation,” De Zuñiga said. In the same briefing, BSP Assistant Governor Ma. Cyd Tuaño-Amador explained that raising the reserve requirement was the preferred move over raising the key policy rate to curb inflationary pressures. Ms. Amador said that when price pressures were created by rising foreign portfolio investments, it was impractical to raise interest rates because such a move could lead to an increase in yields of financial instruments, thereby attracting more foreign portfolio investments. The increase in the reserve requirement, meantime, does not have the same adverse consequence. A higher reserve requirement simply reduces the amount of available cash that banks may lend, thereby tempering future growth of loans that, in turn, help temper a rise in inflation-inducing consumption. Amador said the slow growth rates in industrialized economies and the fast growth rates in emerging markets in Asia like the Philippines were attracting more foreign investments in stocks, bonds and other securities in the latter. While the surge in foreign capital inflows indicated the confidence of investors, these were normally less favored compared with foreign direct investments because foreign portfolio investments, in huge amounts, only cause volatility in the exchange rate without resulting in substantial job-generating investments. Besides increasing the reserve requirement twice this year, the BSP likewise raised the key policy rates twice earlier this year. |
Stocks in U.S. Retreat as Optimism Over Debt-Ceiling Compromise Subsides U.S. stocks fell, dragging the Standard & Poor’s 500 Index lower for a fourth day, as lawmakers indicated they were no closer to reaching an agreement to increase the debt ceiling and avoid default.The Dow Jones Industrial Average erased an advance of as much as 82 points after optimism faded that Democrats and Republicans would be able to compromise over cutting the federal deficit. Exxon Mobil Corp. (XOM) slipped 2.2 percent as its earnings trailed analysts’ estimates. Technology stocks led gains in the S&P 500, with Cisco Systems Inc. (CSCO) climbing 2 percent after Goldman Sachs Group Inc. advised buying the stock. The S&P 500 dropped 0.3 percent to 1,300.67, its lowest level for the month, at 4 p.m. in New York. The Dow slipped 62.44 points, or 0.5 percent, to 12,240.11. “There is no positive news on the debt discussions out of Washington,” Brad Pleimann, head of equity trading at Piper Jaffray & Co. in Minneapolis, wrote in an e-mail before the market closed. “Everyone believes, or at least hopes, that a deal will get done, but as we approach the close with no new news traders begin to unwind risk.” The S&P 500 retreated 3 percent over the previous three days amid concern lawmakers will fail to agree on an increase in the U.S. debt ceiling by an Aug. 2 deadline in order to avoid a default. A House vote on Republican John Boehner’s debt-ceiling measure scheduled for 6 p.m. tonight in Washington was delayed, though a spokeswoman for Majority Leader Eric Cantor said the vote would take place “this evening.” U.S. Contingency Plan Gives Bondholders Priority The U.S. Treasury will give priority to making interest payments to holders of government bonds when due if lawmakers fail to reach an agreement to raise the debt ceiling, according to an administration official. The official requested anonymity because no announcement has been made. The Treasury has said about $90 billion in debt matures on Aug. 4 and more than $30 billion in interest comes due Aug. 15. Overall, more than $500 billion matures in August. The $90 billion in six-month Treasury bills maturing Aug. 4 pared losses after the comments. Obama administration officials will brief the public no earlier than after financial markets close tomorrow on priorities for paying the nation’s bills if the $14.3 trillion limit isn’t raised, a Democratic Party official said earlier. “The announcement is reassuring, but there’s really no alternative to favoring the bondholders,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., which as one of the 20 primary dealers is obligated to bid in Treasury sales. “The alternative would point to a default” Treasury Secretary Timothy F. Geithner has repeatedly said the government’s authority to borrow will run out on Aug. 2 unless Congress raises the debt ceiling. Republicans and Democrats have been unable to agree on an increase in the debt cap or budget cuts, leading to concerns that the U.S. will lose its AAA credit rating. |
Crude Oil Falls, Heads for Weekly Decline, on U.S. Debt Ceiling Dispute Oil fell in New York, heading for the first weekly decline in five weeks, as concern that a failure to reach a deal on raising the U.S. debt limit countered signs that the economy is improving.Futures slipped as much as 0.5 percent after House Speaker John Boehner delayed a planned vote on debt-limit legislation as Senate leaders stood ready to kill the measure should it get to their chamber. Applications for unemployment benefits dropped more than forecast last week to the lowest since April, while contracts to buy previously owned homes rose in June. “We’re waiting for a resolution to the impasse in a white- knuckle fashion,” said Jason Schenker, president of Prestige Economics LLC in Austin, Texas. The impact of the economic numbers “was limited because of the worries about a default.” Crude for September delivery fell as much as 44 cents to $97.00 a barrel in electronic trading on the New York Mercantile Exchange, and was at $97.15 at 8:57 a.m. Sydney time. The contract yesterday rose 4 cents to $97.44. Prices are 2.8 percent lower this week and 1.8 percent higher the past month. Brent oil for September settlement declined 7 cents to settle at $117.36 a barrel on the London-based ICE Futures Europe exchange yesterday. The European benchmark contract settled at a premium of $19.92 a barrel to New York futures, compared with a record close of $22.63 on July 14. |
Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com
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