BSP vows further cut in bank reserves

The Bangko Sentral ng Pilipinas (BSP) remains committed to reduce the level of deposits banks are required to keep with the central bank to single-digit level despite questions about the timing of the action.

BSP Governor Nestor Espenilla Jr. said monetary authorities would continue to slash the reserve requirement ratio (RRR) as the goal is to bring it down to a single-digit level five years from now.

“It is easy to say that the RR cuts result in injecting liquidity into the system at a time when inflation seems to be on the rise. This is a simplistic view. But I dare say, we will not allow ourselves to be so limited in our evaluation,” he said.

Espenilla said more banking intermediation is needed to sustain the fast-growing economy and the RRR cuts are intended to promote efficient financial intermediation.

“These reductions will help curb shadow banking, given the rising challenge of alternatives posed by developments such as fintech. Foresight is essential,” he said.

Close to P190 billion in additional liquidity was injected into the financial system after the central bank slashed the RRR by 200 basis points this year.

The level was first reduced to 19 percent from 20 percent last March, releasing P90 billion followed by another 100 basis points to 18 percent last June, injecting another P100 billion into the system.

The BSP chief said the cuts are not without compensating action as the interest rate corridor (IRC) framework is in place to absorb excess liquidity.

“As such it is intended to be policy neutral operational adjustment. In fact, the liquidity releasing impact of the two previous RRR cuts that we’ve done so far this year, is actually less than the liquidity draining impact of open market operations and our significant foreign exchange operations to manage excessive peso volatility in the face of external uncertainties,” Espenilla said.

This, according to Espenilla, has resulted in tighter financial conditions as evidenced by rising market interest rates.

He said the central bank would continue to rely on changes in the policy rate as its key signaling mechanism of the intended monetary stance.

The BSP has been on a tightening mode, raising benchmark rates by 50 basis points through a back-to-back rate hikes in May and June to curb rising inflationary pressures.

It raised interest rates by 25 basis points for the first time in more than three years on May 10 followed by another 25 basis points last June 20.