BY JIMMY CALAPATI

THE Bangko Sentral yesterday cut bank reserves by 2 percentage points and doubled its rediscounting facility, twin moves that are expected to inject P80 billion into the credit system.

The cut in the statutory reserve requirement from 10 to 8 percent will take effect in November 14. The doubling of the rediscounting facility from P20 billion to P40 billion took effect immediately.

The measures are intended to encourage banks to lend more to each other after banks had been observing to be hoarding cash, resulting in higher interbank rates.

The P80 billion, however, can also be used to speculate against the peso.

The peso closed at 48.81 to the dollar yesterday, down from 48.555 last Thursday. The total value of transactions at the Philippine Dealing System reached $641 million, a bit higher than the $537.47 million the day before, but below the daily average of $850 million in the past months.

The limited peso-dollar deals, traders say, likely mean that banks’ attempts to cater only to legitimate dollar users are working. On the other hand, the limited trade could also mean that less dollars are floating around.

Local banks are now required to maintain 19 percent reserves in the form of 11 percent liquidity reserves (unchanged) to the reduced 8 percent regular reserves.

Key rates currently stand at 6 percent for overnight borrowing and 8 percent for overnight lending.

"The two measures are aimed at preemptively ensuring the proper functioning of the interbank market and guarding against a possible liquidity or credit tightness arising from the global rise in risk aversion," BSP Gov. Amando Tetangco said.

"The rediscounting facility allows banks to borrow from the BSP against eligible promissory notes for short-term liquidity needs," Tetangco added.

Tetangco said the BSP will continue to monitor financial and monetary developments, particularly those in the credit market, and act to shield the financial system from the adverse effects of the global financial crisis.

Despite fears of a liquidity crunch among local financial institutions, Tetangco earlier said money on stream is sufficient but there is a "distribution issue."

Tetangco said interest rates have started to go up but he said this was a normal reaction to risks and not an indication of a credit crunch.

"It is pretty much expected," said Su Sian Lim at DBS Bank in Singapore. "They have been indicating that they’d rather go down this path first than cut interest rates."

The move follows a fall in inflation to an annual 11.2 percent in October from 12.5 percent in August and 11.8 percent in September.

But some analysts believe a cut in key interest rates is still in the offing with inflation on a steady decelerating path.

The central bank kept rates steady at its last meeting in October but raised rates at each of its three previous meetings by a total of 100 basis points.

"I think it is a clear indication that a rate cut is in the pipeline," said Vishnu Varathan, economist at Forecast in Singapore. "There is of course a certain fear that increased liquidity could impact asset markets negatively over the medium term."

The country’s foreign reserves slipped to $35.7 billion at the end of October from $36.7 billion the previous month after authorities intervened in the market to support the falling peso.

Despite the central bank’s market intervention, the peso remained one of the region’s major laggards, losing more than 15 percent so far this year against the dollar.

Central banks in the region actively supported their currencies as markets tumbled when investors pulled out of emerging markets.

The slippage in foreign reserves came from the fall in the price of gold, which pulled down the value of gold holdings, and payments of maturing foreign debts of the government and the central bank, BSP said.

An unidentified government corporation also withdrew a foreign currency deposit with the central bank, it said.

The Philippines’ foreign reserves have been falling steadily since they hit a peak of $36.9 billion at the end of July.

The central bank has said that gross foreign reserves may reach $40 billion next year, up from an estimated $37 billion at the end of this year, supported by steady flows of remittances from overseas workers.