BSP cuts bank reserve requirement
By Melissa Luz T. Lopez
Senior Reporter
THE CENTRAL BANK on Thursday announced a one percentage point cut in bank reserve requirement which takes effect next month, describing the change as “operational” to spur financial market reforms as it now relies largely on weekly term deposit auctions to influence interest rates.
In a statement, the Monetary Board announced the tweak to the 20% reserve requirement ratio (RRR) for universal and commercial banks. This marks the first adjustment to the standard since May 2014.
“In deciding to reduce the reserve requirement ratios, the Monetary Board reaffirms the BSP’s commitment to gradually lessen its reliance on reserve requirements for managing liquidity in the financial system,” the Bangko Sentral ng Pilipinas (BSP) said in a statement late on Thursday.
“At the same time, the Monetary Board noted that the reduction in reserve requirements will help mobilize liquidity in support of economic activity as well as capital market development over the medium term.”
The government kicked off an 18-month reform plan for the local debt market in August last year that seeks to grow the supply of short-term securities and provide reliable financial benchmarks for debt instruments.
The central bank likewise noted that the move signifies a change towards a “more market-based implementation of monetary policy,” which will likewise support a broad financial market reform agenda that seeks to deepen the local debt market and unlock more accessible channels for borrowing.
The RRR cut — which applies to deposit liabilities and substitutes held by big players — takes effect on March 2, according to BSP Circular 997 issued Thursday.
Mandated reserves for thrift banks and rural banks remain at eight percent and five percent, respectively.
BSP Governor Nestor A. Espenilla, Jr. had said earlier this month that the then-looming RRR cut should not be taken as a shift in monetary policy stance. The reserve standard was left out of the Monetary Board’s policy statement last week, as the BSP kept benchmark loan rates steady.
Previously, adjustments to the RRR were made during rate-setting meetings done every six weeks.
Mr. Espenilla has been vocal about plans to gradually reduce the reserve standard since assuming the helm of the central bank in July last year, saying it “distorts” the financial system as it constricts credit to productive sectors. The central bank chief said he wants to see it at single-digit levels.
Sought for comment, BSP Managing Director Francisco G. Dakila, Jr. said the RRR cut was timed as the central bank can now rely more on the interest rate corridor (IRC) scheme, particularly the weekly term deposit auctions, to influence market rates.
“It’s a shifting from one policy instrument to other policy instruments. We now have the corridor system pretty much in place and we do have the available instruments to address any impact of that reserve requirement,” Mr. Dakila said.
On Wednesday, the BSP introduced a 14-day tenor for the term deposit facility (TDF) and hiked next week’s volume to P110 billion from P80 billion.
Mr. Dakila said the one percentage point reduction will unlock about P90 billion in idle funds.
“Even as the BSP continues to refine its instruments and operations under the IRC, the Monetary Board observed that the BSP now has ample scope to mitigate the potential liquidity impact of a phased reduction in the reserve requirement via offsetting auction-based monetary operations,” the central bank statement also noted.
Domestic liquidity expanded by 11.9% in December to P10.6 trillion, according to latest available central bank data.
The TDF is the central bank’s main tool to mop up excess liquidity. The TDF allows banks to park with the BSP idle cash they hold in exchange for a small margin, in turn prodding market rates closer to the three percent benchmark set by the central bank.
Zeno Ronald R. Abenoja, director of the BSP’s Department of Economic Research, added that the regulator can likewise tweak prudential regulations to zoom in on potential risks in the financial system, including concerns of faster credit growth as banks hold additional loanable funds.
Economists said that the RRR adjustment could initially stoke inflation pressures, but noted that its impact can be addressed by other measures.
“I was expecting a cut in the reserve requirement ratio, but I was a bit surprised that it came this early, after January’s sudden surge in inflation and following prior hints from some BSP officials that the cut in the RRR could be deferred until inflation pressures moderate. The increase in liquidity as a result of this move, however, might be partly offset by the rise in the TDF offering,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines.
“If inflation stabilizes towards the end of the year, perhaps the BSP could cut the RRR again by the same magnitude.”
Ruben Carlo O. Asuncion, chief economist at UnionBank of the Philippines, added that it was a “good move” to pursue RRR cuts as the central bank now has enough room to “mitigate any liquidity impacts” by way of its weekly TDF auctions.
