BSP in no hurry to change banks’ reserve requirements

The Bangko Sentral ng Pilipinas (BSP) reiterated it is not yet the proper time to adjust the amount of funds held by banks in their cash vaults as inflation is seen gradually rising until the third quarter.

BSP Governor Amando Tetangco Jr. said in an interview monetary authorities want to make sure the planned reduction in the reserve requirement ratio would not translate to excessive liquidity in the financial system.

“You would have to do this at the right time given that a downward adjustment in the reserve requirement would have to be accompanied by measures that will ensure that the liquidity in the system will remain just adequate so as not to fan inflationary pressures,” he said.

Inflation was steady at 3.4 percent in April after hitting a 28-month high of 3.4 percent in March. Upward pressures remain tilted on the upside given the transitory impact of the proposed tax reform program as well as possible further adjustments in transport fares and electricity rates.

The BSP sees inflation gradually rising until the third quarter of the year before easing in the fourth quarter. The central bank sees inflation to average 3.4 percent this year and three percent next year, within the BSP target of two to four percent.

“The plan to reduce reserve requirement continues to be on the table but at this point in time we want to make sure that liquidity does not become excessive and we have to also do it at the right time because at this point inflation has been rising,” he said.

Tetangco said it may not be the correct or the proper time to reduce the reserve requirement but authorities would continue to monitor the situation.

Philippine banks are required to comply with a reserve requirement of 20 percent, the highest in the region. This is the amount of funds a bank must hold in its cash vault or deposit with the central bank against certain liabilities.

It affects the money supply in the financial system at any given time as a one percentage point cut in reserve requirement would free up P60 billion.

He pointed out market rates have moved closer to the policy rates as envisioned under the interest rate corridor (IRC) system launched in June last year making the transmission of monetary policy more effective. “So we will see if at some point there

will be a need to provide some additional liquidity in case there is some tightness that might develop in the market in terms of liquidity and consider a possible reduction in the reserve requirements,” he said.

Latest data showed liquidity in the financial system grew 11.2 percent to P9.5 trillion while credit growth stood at 19.3 percent to P5.97 trillion as of end-March.

Tetangco said the BSP is currently studying further refinements in the features of the IRC to ensure a more effective implementation of the system. This includes the automation of the overnight deposit facility (ODF) and overnight lending facility (OLF) through the BSP Monetary Operations System (MOS).

Incoming BSP Governor Nestor Espenilla Jr. earlier said the adjustments to be made on the reserve requirement would be data dependent. “We will review our existing reserve requirement policies in the context of making our monetary system more efficient and more market-oriented. These are the general trends that we are looking into,” he said.