Bonds to neutralize excess money supply – Diokno
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said any potential impact of excess liquidity in the financial system will be “sterilized” by the issuance of the BSP bonds and complimented by the weekly term deposit facility (TDF).
“The liquidity released would have to be ‘sterilized’ by complementary monetary operations, such as TDF auctions or issuance of BSP bills, to neutralize its potential impact of domestic money supply, credit, and interest rates,” said Diokno in an email interview.
Diokno confirmed last week that the BSP’s plan to launch its own debt securities for the second semester this year is still on. In the meantime, under the modified enhanced community quarantine (MECQ), the BSP is studying how to resume pre-launch activities that were temporarily stopped when the ECQ was imposed last March 17.
For now, the central bank chief said that “while we see less scope for liquidity absorption at this time” since they have limited TDF auctions and reduced the volume offer of its reverse repurchase (RRP) or repos as well as their increased purchase of government securities, they could afford to pause and to reassess the current liquidity and credit condition.
“We believe that the resumption of our TDF auctions, as well as the much-awaited issuance of the BSP’s own securities, will be necessary not only to partly sterilize our liquidity-enhancing measures, but also to provide market benchmarks on interest rates and support the overall functioning of the financial market amid these challenging times,” said Diokno.
Last March 24, the Monetary Board has given Diokno the authority to cut the reserve requirement ratios (RRR) of up to 400 basis points (bps) this year as one of BSP’s calibrated move to “prevent any strain on domestic liquidity conditions.” The first 200 bps RRR cut was implemented on March 30, releasing about ₱225 billion as fresh bank funds. The BSP cut RRRs for universal and commercial banks and for non-banks with quasi-banking functions.
"In effect, since I assumed office last year, BSP has cut the RRRs by 600 bps — from 18 percent to 12 percent. I’m ahead of my promise (of single-digit level by mid-2023),” said Diokno. “The Monetary Board is prepared to reduce RRRs further, including those for other banks, as the need arises,” he added. He said that with the interest rate corridor, the BSP liquidity management strategy will shift gradually towards issuance of more market-based facilities, while pursuing reduction in RRRs.
“In the meantime, we will continue to assess the impact of the coronavirus pandemic on the broader economy, especially on credit conditions of households and firms,” said Diokno.
The next RRR cut should ensure that liquidity is still sufficient to support credit and economic activity amid the COVID-19 pandemic. On the other hand, the BSP chief said that the temporary suspension of TDF auctions for some tenors will “discourage banks from ‘parking’ their funds with the BSP (while) the BSP’s participation in the secondary government securities market is meant to restore market confidence and thus ensure that the National Government meets its domestic borrowing requirements.”