BSP to maintain ‘gradualist’ approach in RRR cuts

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By Melissa Luz T. Lopez
Senior Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) will maintain a measured approach in cutting bank reserves further, as making a large adjustment in one go could leave players surprised and cause market rates to plummet.

“It always pays to have a gradualist approach in changes in the way we do shifting in the various instruments,” BSP Assistant Governor Francisco G. Dakila, Jr. said during a press chat yesterday.

The central bank trimmed the reserve requirement ratio (RRR) imposed on universal and commercial lenders by one percentage point starting March 2. The “operational” adjustment is expected to free up some P90 billion in funding which the players can deploy for loans, investments and foreign exchange transactions.

BSP Governor Nestor A. Espenilla, Jr. has said that he would like to see the RRR eventually reduced to single-digit levels, pointing out that the high reserves stand as inefficiencies in the financial system as it makes borrowings more expensive. He noted that the phased reduction will be timed alongside an 18-month road map for debt market reforms.

The central bank expects to shore up the excess amounts through its weekly term deposit auctions and via placements in its overnight deposit facility.

Authorities said the RRR cut was timed as the central bank can now rely better on the weekly term deposit auctions to influence market rates, with the view that the regulator can deploy other macroprudential and targeted risk management measures to contain its potential impact on inflation and credit growth.

BSP Deputy Director Dennis D. Lapid said they will continue to chart its slow but sure approach towards reserve cuts, with the current 19% level still the highest in Southeast Asia.

“If you do a one-time large adjustment, we’re not sure how the counterparties will respond also. It might be a case of these financial institutions trying to take a drink from a fire hose if you go to single digits in one big drop,” Mr. Lapid said.

“The risk with the large addition to system liquidity… is that some of the short-term instruments might also drop outside of the corridor, which would in a way negate the gains we’re seeing in terms of interest rate adjustments.”

For example, Mr. Lapid said auction volumes under the term deposit facility have been hiked from P80 billion to P110 billion, with expectations that the additional P30 billion each week will capture the additional money supply.

Asked when the next RRR cut is expected, Mr. Dakila said: “Generally as a rule, especially when talking about monetary instruments, central banks don’t like to pre-commit — meaning they don’t want to promise a move in advance. We look at the data.”