Philippines uses dollar pile against speculators — BSP governor

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The Philippine central bank sells dollars from its pile to curb excessive peso volatility against speculators using a cut in banks’ reserve ratios “as pretext,” Governor Nestor Espenilla said.

The peso, the worst-performing among emerging markets next to the Argentine currency, fell the most in three weeks on Feb. 19 after the Bangko Sentral ng Pilipinas (BSP) announced a cut in lenders’ reserve requirement ratio (RRR) to 19% from 20%. While the move effective March will free up P90 billion ($1.7 billion) from banks’ vaults, Espenilla said this isn’t monetary easing.

Below are Espenilla’s comments:

“If BSP wants to change the monetary policy stance, BSP will signal that overtly, by changing the policy rate (overnight reverse repurchase rate or RRP). But it can also do that more subtly without necessarily changing the RRP rate, by allowing the market-determined TDF (term deposit facility) rates to rise (or fall) by altering auction volumes.”

“The establishment of this new IRC ( interest rate corridor) mechanism since 2016 has given BSP the fine maneuvering room to conduct monetary policy and gradually bring down RRR. The speed and timing of the RRR phase-down is largely a function of the liquidity absorbing ability of OMO (open market operations). Therefore, analyst fears of ensuing looser monetary policy that can fuel more inflation is really unfounded.”

“Moreover, to the extent that speculators use RRR reduction as pretext for peso depreciation, BSP sells FX from its reserves to manage excessive peso volatility. That in itself also has the effect of draining peso liquidity from the system, which causes a self-correction.”

“The bottom line, the BSP has many options to maintain firm monetary control. The key reason it is lowering RRR is to promote a more efficient and level financial system that’s less biased against deposit-taking financial institutions which creates market distortions. This is really in a sense part of a grand normalization process. Alongside capital market reforms and FX liberalization.” — Bloomberg