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Any cut in banks' RRR not a shift of policy reforms: Espenilla



Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. on Thursday said any cut in banks’ reserve requirement ratio (RRR) should not be considered as a shift of policy stance but simply a part of financial market reforms.

This, as some analysts continue to project a cut in the RRR as Philippine monetary officials continue to keep key rates steady even with the threat of inflation rate upticks to beyond the government’s two to four percent target in 2017.

In a WhatsApp message to journalists, the central bank chief said RRR was among the traditional monetary policy instrument of the central bank.

He explained that the BSP “heavily relied on it for a long time to run effective monetary policy in a situation of underdeveloped banking and financial markets and limited CB (central bank) OMO (open market operations) tools.”

“This is no longer the case for the Philippines. Therefore, continued heavy reliance on RRR has become highly burdensome and distorts the financial system,” he said.

To date, RRR, or the proportion of required bank reserves against their liabilities, is 20 percent.

The last time the BSP adjusted the RRR was in May 2014 when it was hiked by a percentage point to 20 percent for universal and commercial banks (U/KBs).

That year, the BSP hiked RRR by a total of 50 basis points, 25 basis points in March and May, as growth of domestic liquidity grew stronger than in the past years at a level of more than 20 percent.

Espenilla noted that “with the shift to the IRC (Interest Rate Corridor) system in 2016, BSP can now effectively manage liquidity in a more market friendly manner.”

He said “this is the logic behind the plan to gradually phase down RRR to single digit levels comparable to those prevailing in ASEAN (Association of Southeast Asian Nations) countries of more or less similar development.”

“This means that forthcoming reductions in RRR should not be mistaken as a change in monetary policy stance. Rather, it should be viewed as part of ambitious financial market reforms that BSP is currently implementing,” he said.

The central bank chief said “high RRR policy belongs to the same regime as extensive quantitative foreign exchange controls that we are also easing.”

“This is more compatible with our more sophisticated financial system and much stronger economy today,” he said.

“Shifts in the monetary policy stance of the BSP will be primarily signaled through changes in its policy rates in order to achieve its inflation targets. The liquidity impact of any RRR reduction will be neutralised through offsetting OMO and transactions with the NG (national government),” he added.

Joann Villanueva / PNA