BSP ready to further trim bank reserves

The Bangko Sentral ng Pilipinas (BSP) said authorities could further slash the level of deposits banks are required to maintain with the central bank amid the effectivity of its facilities to absorb additional liquidity in the financial system.

In his keynote address during the first general assembly of the Money Market Association of the Philippines, BSP Governor Nestor Espenilla Jr. said the shift to the interest rate corridor (IRC) framework with the introduction of the term deposit auction facility (TDF) has given the regulator suf- ficient flexibility.

Espenilla said the effective implementation of the IRC launched in June 2016 now provides the BSP sufficient flexibility to increase reliance on market-based instruments for liquidity management, allowing the central bank to slash the reserve requirement ratio (RRR) to 19 percent from 20 percent last March 2.

The reduction paved the way for the release of P90 billion in additional liquidity into the system that was easily absorbed by the TDF after its volume was raised to P110 billion from P40 billion at the start of the year.

“Initial evidence based on the last three TDF auctions since the first RRR cut took effect are encouraging and indicative of the potency of the IRC facilities for liquidity absorption. We can definitely do more as the system continues to mature,” Espenilla added.

The BSP chief has been very vocal about his plan to reduce the ultra high RRR to single digit levels to allow efficient absorption and mobilization of liquidity.

“As with the shift to the IRC system, the phased reduction in RRR is an operational adjustment and will not materially affect prevailing monetary policy settings. Excess liquidity released to the market will be re-absorbed through offsetting adjustments in our open market operations that are informed by our updated liquidity forecasts,” Espenilla said.

The reduction of the level of deposits banks are required to keep in the central bank vault allows banks to lend more to different sectors, thereby supporting the country’s expanding economy.

Espenilla said the central bank would continue to expand its policy toolkit, including enhancing price discovery and self-correcting mechanisms that started with the shift to the IRC system.

“It has allowed us to provide more effective guidance to short-term market interest rates by promoting healthy price discovery as the BSP calibrates auction volumes,” he said.

Espenilla added market rates have seen a stronger anchoring to the BSP’s policy rate while time deposit and short term interest rates of big banks have trended upwards and aligned with the central bank’s IRC.

Despite the reduction, the Philippines has the highest RRR in the region compared to China’s 17 percent, Brazil’s 15.5 percent, Indonesia’s 12 percent, Thailand’s six percent, Taiwan’s six percent, India’s four percent, Malaysia’s 3.5 percent, Singapore’s three percent, and Japan’s 0.8 percent.