The peso reacted swiftly to a decision by the Bangko Sentral ng Pilipinas (BSP) to tighten its monetary policy for the first time in a year to curb currency speculation.
Accordingly, the peso closed at 54.48 to the dollar or a gain of 49 centavos from its closing rate of 54.97 to $1 last Wednesday.
Meanwhile, at the Philippine Stock Exchange (PSE), the 30-company composite index steadily climbed during the session and gained 18.87 points or 1.87 percent to end at 1,039.33, the highest since Feb. 13.
Value turnover dipped to P422.84 million from Wednesday’s P469.65 million.
Analysts, however, said the market may not be able to sustain the rally in the coming sessions and will likely consolidate as the war in Iraq drags on.
"The market has priced in the ill effects of a war. The impact on the market is positive today because the uncertainties has finally been cleared," said AB Capital economic analyst Jose Vistan.
"But a war in a real sense will bring us no good. Investors are positioning for short war. Once the emotions have subsided, the market will just continue to consolidate," Vistan said.
Analysts also said investors may continue snapping up favored blue chips like Ayala and PLDT as they position ahead of war’s end. "Blue chips will rule. Stocks are still at bargain prices," they said.
Ayala Corp. which has interest in banking, property, and telecommunications, was the session’s most active and rose five centavos to close at P4.20.
Philippine Long Distance Telephone Company (PLDT), the country’s largest telco, gained 4.24 percent or P12.5 to end at P307.5.
Utility firm Manila Electric Company-B, which is open to foreigners, rose 50 centavos to end at P14.
It also hiked commercial banks’ liquidity reserve requirement to eight percent from seven percent effective Friday.
"It( the BSP decision) may help steady the peso as tighter liquidity suggests that banks can take smaller long-dollar positions," said Jojo Gonzales, research head of Philippine Equity Partners Inc.
The last time the MB increased the liquidity reserve requirement was in August 2001 when the peso was under heavy speculative attacks. That year, the MB also sanctioned nine banks for speculation.
According to the BSP, the move was a "preemptive response to inflationary risks" spawned by the volatility of the peso against the dollar.
The reserves are kept as a buffer against sudden surges in banks’ withdrawals and also serve as control on domestic money supply.
"The decision to remove the tiering scheme and raise the liquidity reserve requirement is intended as a pre-emptive response to inflationary risks," BSP Deputy Governor Amando Tetangco said yesterday.
"The Monetary Board believes that the risk of higher future inflation arising from exchange rate movements requires a policy response in order to limit the potential impact on consumer prices."
Tetangco also said the measures should not have any impact on domestic interest rates, since the policy rates were not touched. "The move is essentially to make it more attractive for banks to park their funds. It will be our cost because we are trying to attract them."
It was the first monetary policy move by the central bank in a year. The bank did not touch its overnight interest rate – a more direct monetary tool – which it has kept steady at seven percent for the borrowing rate and 9.25 percent for the lending rate since March 2002.
Analysts said the measures were more subtle than a direct hike in overnight rates that may negatively impact on a slow-moving economy and put further pressure on the country’s ballooning budget deficit.