BSP further trims bank reserves

Peso hits 12-year low

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) decided yesterday to cut the level of deposits banks are required to maintain with the central bank, releasing close to P100 billion in fresh funds into the financial system to support the country’s growing economy.

The reduction of the reserve requirement ratio effective June 1 came weeks after the central bank raised its benchmark rates for the first time in more than three years to help arrest potential second-round effects of the implementation of the new tax reform law.

BSP Governor Nestor Espenilla Jr. issued Circular 1004 reducing by one percentage point the reserve requirement ratio of banks to 18 percent from 19 percent.

Espenilla said the Monetary Board through Resolution 471 dated March 22 approved the one percentage-point reduction in the reserve requirement ratio of banks.

This is the second cut implemented by the BSP after the first one percentage-point reduction that took effect on March 2. The action released about P90 billion worth of liquidity into the financial system.

Espenilla has made a pronouncement that he wants to see the “ultrahigh” reserve requirement ratio reduced to single-digit levels.

Despite the series of cuts, the Philippines still 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.

As part of its medium-term financial market reform agenda, the central bank continues to pursue the gradual and phased reduction in the reserve requirement ratio.

“The reduction in reserve requirements is also part of the BSP’s broad financial sector reform agenda to promote a more efficient financial system by lowering intermediation costs,” the BSP said.

The regulator added the operational adjustments are part of the shift toward a more market-based implementation of monetary policy that aims to gradually reduce the BSP’s reliance on reserve requirements for managing liquidity in the financial system.

The BSP said the auction-based monetary operations under the interest rate corridor (IRC) framework has allowed the BSP to provide more effective guidance to short-term market interest rates, which should help facilitate healthy price discovery on the cost of funds in the financial system.

Furthermore, it said the calibrated reductions in reserve requirement ratios are not intended to signal any change in the prevailing monetary policy stance, as the BSP continues to have the scope to offset their potential liquidity impact via an expansion in auction-based monetary operations.

“Shifts in the monetary policy stance will continue to be signaled through adjustments in the policy rate, which will in turn continue to depend primarily on the BSP’s outlook for inflation as informed by economic data,” the BSP said.

Last May 10, the BSP raised benchmark rates by 25 basis points as it shifted to tightening mode to help arrest potential second-round effects of the implementation of the new tax reform law.

This, after inflation breached the two to four percent target of the BSP as it averaged 4.1 percent in the first four months. Inflation leapt to a fresh five-year high of 4.5 percent in April from 4.3 percent in March.

ING Bank Manila senior economist Joey Cuyegkeng said the recent underperformance of the peso could be traced to the anticipation of the market about the reduction of the reserve requirement ratio.

“Banks would likely use part of the liquidity to finance the economy thorough higher loans. If this liquidity is not removed, then economic growth should be enhanced. But the trade gap would widen eventually and result to underlying weakness of peso,” Cuyegkeng said.

The economist said the peso liquidity in the system would be high in the very short term.