BSP: not time to cut reserve requirement
CURRENT financial conditions are not yet ripe for planned cuts in bank reserves since the economy remains awash with cash, the central bank chief said.
Bangko Sentral ng Pilipinas ( BSP) Governor Nestor A. Espenilla, Jr. said robust growth in money supply and bank lending puts off plans to trim the 20% reserve requirement ratio (RRR) which is imposed on universal and commercial banks.
“While the current manageable outlook for inflation allows scope for a reduction in RRR, domestic liquidity conditions are not unduly tight, as both M3 ( domestic liquidity) and credit continue to expand at doubledigit rates,” Mr. Espenilla said in an interview with GlobalSource Partners that was published on Jan. 28.
NO NEED FOR MORE STIMULUS
“Moreover, the overall pace of credit growth is also considered to be in line with the requirements of the economy, suggesting that additional stimulus to the real economy is not necessary at present.”
Mr. Espenilla — who took over the central bank’s helm in July last year — has been vocal about his goal of reducing the reserve level required of big lenders, saying that it has since been a source of “inefficiency” in the country’s banking system.
The BSP chief has said that he personally wanted to see the RRR down to single-digit levels.
The 20% RRR is considered one of the steepest in the world, as it forces lenders to keep a fifth of their cash holdings as standby funds which do not generate returns.
The reserve level was last adjusted in May 2014.
Economists have been betting that the BSP will tweak reserve requirements before adjusting interest rates, although some observers are of the view that the RRR cuts may be timed with a rate hike.
Some in the financial sector have been arguing that it may be time to start a gradual reduction of the RRR, as it will free up more cash for them to deploy for loans and investment instruments.
“If the reserve requirement is smaller, then banks have the ability to actually lend more or be more involved in lending activities and treasury transactions,” Hans B. Sicat, country director of ING Bank N.V. Manila, said in a recent interview.
“It’s been the banking sector’s hope that should have happened even before. I guess we’ll wait and see how the BSP reacts.”
Higinio O. Macadaeg, Jr., president and chief executive officer at the United Coconut Planters Bank, shared this view, saying the RRR cut will be “helpful to the economy.”
A one percentage point reduction in the RRR could unleash some P60-70 billion into the financial system, flooding a market already swimming in cash.
Releasing more funds to the system could push prices up if these are not absorbed for productive uses.
Domestic money supply grew by 14% to around P10.4 trillion as of end-November, while bank credit surged by 19.2% to reach P6.96 trillion in the same period, according to latest available central bank data.
Mr. Espenilla said discussions on an RRR cut are ongoing at the BSP, as he noted that the “timing and magnitude” of these tweaks should not disrupt price stability.
The central bank expects Republic Act No. 10963 — or the Tax Reform for Acceleration and Inclusion Act that took effect this month — to add less than one percentage point to overall inflation, even as monetary authorities watch out for second-round effects such as on wages and public transport fares.