BSP sees room to cut bank reserves further

By Melissa Luz T. Lopez, Senior Reporter

THERE is room to cut bank reserves further as more surplus funds are parked as term deposits, the country’s central bank chief said, just as the monetary authority remains comfortable with current borrowing rates.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. on Friday said the reserve requirement ratio (RRR) imposed on universal and commercial banks will be trimmed further under his watch, notwithstanding concerns of rising inflation.

The central bank kicked off the process with an “operational” adjustment of the reserve standard to 19% starting March 2. The central bank expects to shore up additional liquidity through its weekly term deposit auctions and placements in its overnight deposit facility.

Some P90 billion is expected to be freed up with every one percentage point reduction in the RRR. Mr. Espenilla said he personally wants to see the required reserves down to single-digit levels in the future.

Prior to this move, the RRR stood at 20% since May 2014 — among the highest in the world — and has been considered as an “inefficiency” to the local financial system as it made borrowing costs more expensive.

In a speech before the Money Market Association of the Philippines, Inc., Mr. Espenilla said the shift to the interest rate corridor (IRC) since mid-2016 has proven “effective,” allowing the central bank to have a better handle on money supply given the various tenors offered to banks for their idle funds.

“As with the shift to the IRC system, the phased reduction in reserve requirements is an operational adjustment and will not materially affect prevailing monetary policy settings,” Mr. Espenilla said.

“Initial evidence based on the last three TDF auctions since the first RRR cut took effect are encouraging and indicative of the potency of the IRC facilities for liquidity absorption. We can definitely do more as the system continues to mature.”

The “phased and gradual” reduction in reserves will “allow for more efficient absorption and mobilization of liquidity,” the BSP governor added.

Domestic money supply grew by 12.8% in January to reach P10.6 trillion, according to latest available central bank data. Bank lending jumped by 19.1% year-on-year that month, sustaining double-digit increases.

Still, the BSP official said they continue to hold a wide array of tools to maintain control of the local financial system, saying that policy rates as well as a “flexible” exchange rate remain potent influencers of market activity.

“[W]e can also adjust monetary conditions without necessarily changing the policy rate, by adjusting auction volumes to move the market-determined TDF rates,” Mr. Espenilla said.

The Monetary Board kept borrowing rates unchanged on Thursday, saying there was no need for a fresh stimulus on the back of robust domestic economic activity and with inflation still expected to stay within the 2-4% target band.

The first RRR cut was approved during the Feb. 8 policy meeting, but was announced a week later to demonstrate that it is different from a change in policy stance.