RRR cuts not policy shift BSP

PLANS TO REDUCE bank reserves should not be taken as a shift in monetary policy, the Bangko Sentral ng Pilipinas (BSP) chief said, as such adjustments simply seek to improve access to funding.

“[ F] orthcoming reductions in RRR (reserve requirement ratio) should not be mistaken as a change in monetary policy stance. Rather, it should be viewed as part of ambitious financial market reforms that BSP is currently implementing,” Governor Nestor A. Espenilla, Jr. said in a text message to reporters.

Mr. Espenilla has been vocal about plans to gradually reduce the 20% reserve requirement imposed on universal and commercial banks since assuming the helm of the central bank in July last year, dubbing it as an “inefficiency” to the financial system as it constrains lenders from offering additional credit lines to productive sectors.

The reserve level — which was last adjusted in May 2014 — is deemed as one of the highest in the world, as it mandates all lenders to keep a fifth of their cash holdings as standby funds which do not generate returns.

“High RRR policy belongs to the same regime as extensive quantitative FX (foreign exchange) controls that we are also easing. This is more compatible with our more sophisticated financial system and much stronger economy today,” Mr. Espenilla said.

In August last year, the BSP and other government agencies unveiled an 18-month road map meant to deepen the local debt market. The goal is to provide an alternative source of financing for corporates, especially for longterm borrowing for big- ticket infrastructure projects.

The BSP official said the RRR previously stood as a traditional tool for the central bank given “underdeveloped” financial markets and limited tools on the central bank’s disposal for its open market operations (OMO).

“This is no longer the case for the Philippines. Therefore, continued heavy reliance on RRR has become highly burdensome and distorts the financial system,” the BSP chief pointed out, saying that the shift to an interest rate corridor in 2016 has since allowed the monetary authority to have a better handle in managing money supply.

The new regime involves the weekly offering of term deposits, which allows banks to park their idle funds under week- long or month-long arrangements with the BSP in exchange for a small return. This way, the central bank is able to mop up excess liquidity and prod market rates closer to its three percent benchmark.

Domestic liquidity expanded by 11.9% in December to reach P10.6 trillion, according to latest available central bank data.

In a recent interview with GlobalSource Partners, Mr. Espenilla said current liquidity conditions are not “unduly tight” while credit growth remains buoyant and productive, leaving it unnecessary to introduce a fresh monetary stimulus.

“Shifts in the monetary policy stance of the BSP will be primarily signalled through changes in its policy rates in order to achieve its inflation targets,” Mr. Espenilla clarified.

“The liquidity impact of any RRR reduction will be neutralized through offsetting OMO and transactions with the national government.”

The Monetary Board, which is the highest policy-making body in the central bank, will hold their first policy review for the year next Thursday.