No limit to how much BSP can re-absorb liquidity from RRR cuts

The Bangko Sentral ng Pilipinas’s (BSP) open market operations can reabsorb released funds from the easing of banks’ reserve ratios and there is no limit to how much they can take in, according to officials.

BSP Deputy Governor Francisco G. Dakila Jr. said there is no limit in the BSP’s capacity to siphon off excess cash flowing in the financial system as they continue to cut reserve requirement ratio (RRR).

The BSP’s monetary operations include the auction-based term deposit facility (TDF) and the overnight reverse repurchase (RRP) facility – both under the interest rate corridor (IRC) framework that the BSP adopted in 2016.

Dakila said since they do critical liquidity forecasting every week, they can easily decide to adjust the TDF volume depending on demand

“We could always increase the volume of the TDF (so) there is no limit,” he added.

In 2018, however, when the BSP cut RRR by 200 basis points (bps), BSP Governor Nestor A. Espenilla Jr. at the time said this was as far as they could go because the TDF capacity then was tight.

Dakila explained that since the IRC was implemented only in mid-2016, and after refinements done to the TDF in 2017, by 2018 when the Monetary Board approved an RRR reduction, there was still a limit to how much it can absorb the excess funds. About P90 billion of fresh cash is released to the system for every 100 bps or one percent cut in RRR.

“As you know, then (2018) we were just introducing the TDF as a policy instrument,” said Dakila. He added that it is now a different TDF and RRP set up after several operational refinements or improvements to the IRC in the past year.

Last May, the Monetary Board approved a 200 bps reduction in big banks’ RRR to be implemented in three stages. By end-July, a total P180-200 billion of new liquidity was released in the financial system. An additional P11-12 billion was also released from the RRR adjustments of thrift and rural banks.

BSP Director Dennis D. Lapid of the Department of Economic Research said the released bank funds found their way back to the BSP via the TDF and RRP. When asked which facility was most favored, he said – “it’s both, it’s mixed in, in RRP and TDF (equal volume).” Some of the liquidity was also used to invest in government securities.

During the August 8 Monetary Board meeting, where the seven-man board voted to a new policy rate cut of 25 bps – for a total 50 bps from May 9 – due to a benign inflation environment, Dakila said the RRR was not taken up in this meeting.

But, as Governor Benjamin E. Diokno has announced earlier, he said the “reductions in reserve requirement can be part of the long-term structural reform program (of the BSP) and it is also operational in nature so it does not have any bearing on monetary policy decision.”

“As of now, the liquidity released from reserve requirements have found their way mostly to the facilities of the BSP and some have gone in government securities,” noted Dakila. “So, we have yet to see the bulk of liquidity going into bank lending and the economy… but of the course the decision of when to resume the reduction in RRR is a live discussion in the Monetary Board.”