Current conditions ‘not yet ripe’ for cut in reserve requirements

By Melissa Luz T. Lopez,
Senior Reporter

CURRENT LIQUIDITY conditions do not make the case for reducing the reserve requirement ratio (RRR) anytime soon, a senior central bank official said, as pumping the system with more funds could push prices up.

“I think for this year — this is just my personal view — I think the conditions are not yet ripe,” Bangko Sentral ng Pilipinas (BSP) Deputy Governor Chuchi G. Fonacier said in a recent interview.

“When you do an RRR reduction, you should already be comfortable about the liquidity situation in the market because when you reduce the reserve requirement, it will free up the funds. Are you sure that it will go to productive [uses]? If it will not be captured, there’s excess liquidity in the system and it becomes inflationary.”

Money supply expanded by 14.5% in September to hit P10.146 trillion, latest central bank data showed.

A one percentage point reduction in the RRR could unleash between P60-70 billion to the financial system, which could flood the market that continues to be awash with cash. Economists have warned that this could be inflationary if left unchecked.

Ms. Fonacier said flooding the financial system with fresh money supply via an RRR cut could push prices up if the funds are not absorbed by productive sectors.

Central bank officials have stressed the need to reduce the 20% reserve standard imposed on universal and commercial banks, with Governor Nestor A. Espenilla, Jr. even eyeing to trim it to single-digit levels to remove this “inefficiency” to the local financial system.

The 20% RRR is deemed as one of the highest in the world, which essentially mandates all lenders to keep a fifth of their cash holdings as standby funds which do not generate returns.

The International Monetary Fund (IMF) has thrown support to the reserve cut planned by the BSP, but noted that this adjustment needs to be carefully calibrated.

Substantially tighter liquidity conditions could be a good time for the RRR cut, IMF country representative Yongzheng Yang said last Friday.

Several bank economists also expect tweaks to the RRR as its next move before adjusting monetary policy rates, with the “gradual” reduction seen to start by next year the earliest. Still, any adjustments will have to be considered in line with emerging money supply, inflation, and credit dynamics.

Mr. Espenilla has said that lowering the reserve level would also fall in sync with an industry-wide initiative to deepen the local debt markets.

“The lowering of the reserve requirement is not about relaxing monetary policy. It’s about substituting direct instruments… with indirect and more market-friendly instruments, open market operations,” the central bank chief told reporters.

“As we phase out, we phase in.”