THE CUT in bank reserves is a “neutral” move as far as monetary policy is concerned, with succeeding moves to depend on how much liquidity can be mopped up by central bank operations, its chief said.
Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said the “phased reduction” in the country’s high reserve requirement ratio (RRR) does not constitute an easing of monetary policy, since any excess liquidity that will be released to the system will be mopped up by other central bank’s tools, particularly via the term deposit facility (TDF) and the interest rate corridor.
“What BSP is executing is just an operational adjustment that should have a neutral effect on the monetary policy stance,” Mr. Espenilla told reporters in a text message.
“If BSP wants to change the monetary policy stance, BSP will signal that overtly, by changing the policy rate,” he added.
“But it can also do that more subtly without necessarily changing the RRP (reverse repurchase) rate, by allowing the market-determined TDF rates to rise (or fall) by altering auction volumes.”
On Feb. 15, the BSP announced that bank reserves will be reduced to 19% — from 20% among big banks — effective March 2, in keeping with Mr. Espenilla’s long-term goal of reducing the RRR level to single-digit levels.
The RRR cut is estimated to unlock about P90 billion of idle funds, which the central bank expects to mop up through its weekly term deposit auctions and via placements in its overnight deposit facility. The weekly term deposit volumes have been hiked to P110 billion following the surprise RRR reduction.
“The speed and timing of the RRR phase-down is largely a function of the liquidity-absorbing ability of OMO (open market operations),” Mr. Espenilla added.
“Therefore, analyst fears of ensuing looser monetary policy that can fuel more inflation is really unfounded,” he added.
“The bottom line: the BSP has many options to maintain firm monetary control. The key reason it is lowering the RRR is to promote a more efficient, level financial system that’s less biased against deposit-taking financial institutions which creates market distortions.”
Aside from the RRR, the central bank is also pursuing parallel reforms in capital markets and in easing foreign exchange restrictions as part of a “grand normalization” process, the BSP chief added.
Several analysts have pointed out that the reserve cut will effectively free up additional money into the system, at a time when markets remain awash with cash. These observers said the BSP may need to raise borrowing rates in order to prevent excess funds from bumping up prices of goods beyond expectations. — Melissa Luz T. Lopez