By Lee C. Chipongian
Incoming Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno expects the average inflation rate will drop to two percent by the third or fourth quarter this year but he wants to review banks’ reserve ratio by May for possible cut in the second half of 2019.
In his first briefing as newly-appointed central bank chief and his last as budget secretary at the Department of Budget and Management in Manila, Diokno said he will pursue a largely pro-growth monetary policy, and the market reads this as a preference to ease policy rates to support economic growth.
The new BSP governor wants a faster reduction in the reserve requirement ratio (RRR) to single-digit level, or ahead of the 2023 previous target, to cut intermediation costs. “I want to accelerate reduction of the RRR,” said Diokno. The next RRR cut could come after they’ve seen evidence that inflation is still on a decline in March and April. “We’ll review it. (RRR) is too high,” he said. The RRR, which are reservable liabilities of all banks with the BSP, is currently at 18 percent.
“We’ll look at the timing. Timing is important,” said Diokno. He said he’d like to see two more points of decline in the inflation rate, in March and April. “We can review as early as tomorrow (when he meets the Monetary Board) and I can instruct the technical staff to review interest rates and RRR.. anything that will reduce intermediation costs.”
The market expects the BSP to reduce the RRR by another 200 basis points – at least – for this year, it was the same rate of reduction in 2018 and released P190 billion of liquidity in the market. This excess money supply was reabsorbed by the BSP via its weekly auction-based open market operations, and therefore was not inflationary.
Diokno said he also agrees with Deputy Governor Diwa C. Guinigundo that an RRR cut now will be too soon, and they will have to be data-dependent on when to execute another reduction. The same goes for the policy rate which was raised by 175 basis points last year to fight high inflation. “(These) need study and (should be) based on evidence,” he told reporters.
February inflation slipped to 3.8 percent from 4.4 percent in January, but the year-to-date average is still 4.1 percent. Guinigundo has said that the inflation path has to be firmly within the two-four percent target range, month-on-month and year-on-year, before the Monetary Board, to be chaired by Diokno, can consider tweaking the RRR again.
In the meantime, Diokno said he will continue the late BSP chief Nestor A. Espenilla Jr.’s financial inclusion and digitalization programs and objectives, and ensure the banking system will continue to be sound and stable.
He said he is familiar on how banks works, particularly on risk management, having worked as an independent director of Asia United Bank, the country’s 14 biggest bank out of 43 universal and commercial banks. He also said that as a former bank director, he is aware that the number one threat in the global banking and financial world right now, is cyber-related crimes and he knows to engage banks to further strengthened their cybersecurity. The Philippines was front and center in 2016 when an $81-million cyber-heist victimized one big bank, which had to pay a fine of P1 billion to the BSP as penalty.
Diokno is scheduled to take his Oath of Office Wednesday night, in a private function in Malacanang. He will be the BSP’s fifth governor. His appointment, however, was considered “out-of-the-blue” by the market, bankers and academe-economists, who expected any one of the three deputy governors of the BSP, specifically Guinigundo, will step in and serve out the remaining four years of Espenilla’s six-year term.
Diokno has addressed this surprised appointment, and negated his critics’ comments that he is not qualified to run an independent central monetary authority, emphasing that he is an economist and he is trained to look at both the fiscal and monetary sides of the economy.
He also denied that his appointment was politicized amid current legal debate whether or not he should be subjected to Commission on Appointments (CA) confirmation, the implication being, that he would not be confirmed by lawmakers. He was at odds with members of the Lower House on issues of alleged insertions in the 2019 national budget.
Justice Secretary Meynardo Guevarra, when asked, said that while the amended BSP Charter does say that as head of a department, the BSP governor is subject to CA confirmation, this provision has questionable validity.
“(The New Central Bank Act as amended) has a provision requiring confirmation of the BSP governor’s appointment by the CA. But, that is of doubtful validity because the (1987) constitution has identified specific positions requiring CA confirmation, and the BSP governor’s position is not one of them. However, that issue is for the SC (Supreme Court) to resolve squarely and categorically.”
“The prerogative to appoint the governor of the BSP (lies with President Duterte) I do not question his decision and nobody should be,” said Diokno. “There’s no one (who has) the birthright to say that the governor should come from this group or that group … (but) what (I’m against) is appointing a banker … anybody but a banker because then you appoint ‘one of the boys’,” said Diokno. If not him, he said he would rather one of the three career central bankers are appointed as the BSP chief.
In a statement Wednesday, BSP officer-in-charge, Deputy Governor Ma. Cyd Tuano-Amador said Diokno as next governor “brings with him a special brand of leadership honed from decades of exposure to different facets of government operations to improve the lives of Filipinos, in cooperation with the private sector, the academe, and various organizations.”
She said the BSP community “looks forward to his assumption into office tomorrow, Thursday, and to working closely with him to ensure the smooth functioning of the central bank to effectively discharge its mandate to promote price and financial stability, to ensure a safe, reliable and efficient payments system as well as to help sustain economic growth that is inclusive and participatory.”