THE BANGKO SENTRAL ng Pilipinas (BSP) will not introduce further cuts in required bank reserves this year, its chief said, and may pause until inflation eases back on target in 2019.
BSP Governor Nestor A. Espenilla, Jr. said two cuts in the reserve requirement ratio (RRR) introduced earlier this year should be enough for now, as the central bank takes stock of rising inflation and related developments in financial markets.
“We have already achieved significant progress this year,” Mr. Espenilla told financial analysts on Wednesday afternoon.
The BSP chief met on Wednesday with bank economists and other market watchers to “promote better understanding” of the central bank’s mandate. This comes as some analysts have flagged confusing signals from the central bank, particularly on the timing of interest rate adjustments.
Since June, universal and commercial banks have been required to keep 18% of deposits as reserves from 20% previously.
The two RRR cuts of one percentage point each have freed up about P200 billion for increased lending and bank investments, although the BSP said these have been siphoned by its weekly term deposit auctions.
Some economists argued that the RRR cuts in March and June ran counter to back-to-back 25 basis points (bp) interest rate increases from the Monetary Board, as the former injected liquidity to the system while the hikes pushed up yields.
“This initiative can resume next year just as inflation returns to target based on our forecast. The goal of achieving single digit RRR by the end of my term is therefore quite attainable without sacrificing effective monetary control,” Mr. Espenilla told reporters via WhatsApp message when pressed further.
Inflation has trended above the 2-4% target in recent months and peaked at 5.2% in June. Prices increased by an average of 4.3% last semester, versus a 4.5% full-year projection.
Mr. Espenilla added that the 200bp cut in required bank reserves has done its part in sending a “credible and concrete signal” to the market.
In its latest assessment on the Philippines, the International Monetary Fund (IMF) suggested for the central bank to halt further RRR cuts “until inflation is clearly on a downward path and inflationary expectations are better anchored.”
IMF mission chief Luis E. Breuer backed further tightening moves from the BSP to rein in inflation. Mr. Espenilla said the central bank is considering a “strong follow-through” policy adjustment in its Aug. 9 meeting.
Still, the BSP chief reaffirmed his commitment to a gradual reduction in deposit reserves. “This will lower friction costs in the banking sector, create more efficient financial intermediation, and help curb shadow banking given the rise of strong alternatives offered by fintech and digital innovation,” Mr. Espenilla said, noting that future cuts will be timed “deliberately.”
“Excess liquidity is reabsorbed through our open market operations and significant FX operations. The upward trend in market rates validates tighter market conditions.”
Average yields on term deposits offered by the central bank have been hovering close to four percent, or the ceiling of the 3-4% range for benchmark interest rates. — Melissa Luz T. Lopez

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