The Bangko Sentral ng Pilipinas (BSP) has yet to decide whether to defer banks reserve requirement ratio (RRR) cut to next year or pursue a reduction by end-2022 despite its current aggressive hawkish policy stance to curb inflation.
RR ratio is the portion of reserves that commercial banks must hold onto, rather than lend out or invest. The RRR is currently at 12 percent for big banks and 14 percent for non-banks. Since a lower RRR reduces intermediation costs, the BSP wants to reduce the ratio to single-digit levels by 2023.
BSP Governor Felipe M. Medalla told Manila Bulletin that so far, there are no discussions of a possible postponement of RRR reduction at the moment. His predecessor, now Finance Secretary Benjamin E. Diokno, said earlier that an RRR cut is likely by the fourth quarter of this year.
But, the BSP’s plan to slice RRR by October or November was before the Monetary Board tightened the policy stance by as much 125 basis points (bps) in three straight policy decisions. From May 19, the two-percent borrowing rate has been increased to 3.25 percent by July 14 in an off-cycle move to re-anchor inflation expectations.
When asked if the Monetary Board is reviewing deferring the RRR cut to 2023, Medalla said: “Not right now.”
The BSP is not there yet but a review is on the table because – as signaled by Medalla – they are not done in terms of monetary policy adjustments.
Raising the reserve requirement reduces the amount of money that banks have available to lend. Since the supply of money is lower, banks can charge more to lend it. That sends interest rates up. Changing the requirement is expensive for banks.
BSP Deputy Governor Francisco G. Dakila Jr. said the key factor on whether or not an RRR cut will still happen this year is the timing. He reiterated that the adjustment in the reserve requirements is “not indicative of any change in monetary policy stance but will be an operational adjustment” in nature.
Diokno, and before him the late BSP Governor Nestor A. Espenilla Jr., had intended to bring down the RRR to single digit levels by 2023.
“I’m sure this is also the direction that we would be pursuing,” said Dakila, adding that timing the RRR reduction is a continuing discussion in the Monetary Board.
BSP Director Dennis D. Lapid of the Department of Economic Research, meanwhile, said if the BSP decides to reduce the RRR and release additional liquidity into the financial system, the central bank will have the ready facilities to mop up excess money supply.
Lapid noted that with the ongoing exit from monetary accommodation, BSP’s liquidity-mopping operations are now being geared towards increased liquidity absorption. The BSP has been unwinding previous liquidity provisions including measures such as national government advances and purchases in the secondary market for government securities.
Lapid said that as BSP unwinds these liquidity provisions, they have also started to scale up some of its monetary operations to absorb more excess liquidity and offset any potential increase in liquidity that might be caused by an RRR cut. “These are largely technical adjustment in terms of substituting a direct instrument like a reserve requirement from more market-friendly and auction-based instruments like time deposit facility and the BSP bills,” he said.
The BSP’s primary monetary policy instrument is the interest rate on its reverse repurchase facility. But BSP has the option to reduce banks’ reserve requirements to control inflation and to siphon off liquidity via its weekly auctions of securities and term deposits.
The BSP plans to cut the RRR when it cancels or withdraw the assistance to the micro, small and medium enterprises (MSMEs) as alternative compliance to the reserve requirement. This pandemic-related relief measure will expire by end-December.
Since 2020, the BSP allows banks to use loans to MSMEs and large enterprises not affiliated with conglomerates as alternative compliance with the reserve requirement against deposit liabilities and deposit substitutes. It is one of BSP’s anti-pandemic measures to make sure banks are continuously supporting key sectors of the economy.
The alternative compliance with RR is until December 29 only but “subject to early closure, if warranted and with prior notice.”
As BSP often tells the market, an RRR cut is a move intended to be an operational adjustment to facilitate the BSP’s shift to market-based instruments for managing liquidity in the financial system, particularly the term deposit facility and the BSP securities.
In 2020, the Monetary Board approved a 400 bps cut to RRR but the BSP only reduced the ratio by 200 bps, seeing no further need to use up the entire 400 bps authority to slash the RR ratio.
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