By Lee C. Chipongian
The seven-member Monetary Board of the Bangko Sentral ng Pilipinas (BSP) will prioritize discussion on possible reduction in banks’ reserve requirement ratio (RRR) when they meet on Thursday for its regular weekly meetings.
BSP Deputy Governor Diwa C. Guinigundo said that the central bank will be discussing the RRR cut proposal as both an operational adjustment and as a monetary policy tool to influence liquidity.
The market highly anticipates the BSP will cut the RRR or the percentage of bank deposits and deposit substitute liabilities that banks maintain or deposited with the central bank. The reserves ratio is currently still high at 18 percent.
The BSP reduced the RRR by 200 basis points (bps) in 2018. The Monetary Board said the move was policy neutral since the extra liquidity it released to the financial system – about P180-190 billion – was reabsorbed by the BSP’s auction-based term deposit facility (TDF).
BSP Governor Benjamin E. Diokno disclosed last Thursday that while they did not touch on the RRR as they decided to reduce the benchmark rate by 25 bps, they have tabled the RRR cut proposal for this week. This is consistent with market expectations that the BSP will slash interest rates first, then reduce the RRR immediately after.
Guinigundo said it will be harder to describe the move – if the BSP will cut RRR this week – as policy neutral. He said that theoretically, the fresh liquidity could be placed in the TDF, or the BSP could issue its own bonds after its authority to do so has been restored last February.
But, the market and the banks have other options where to put their money. They could use it to buy US dollars, lend it out to corporates or individuals or the government could again float retail treasury bonds. The banks can also park their funds with the BSP, in the TDF.
“Who can tell where the banks will prefer to place their money? They still have P300 billion to P400 billion (funds) with the BSP, they can easily withdraw that and fund additional lending, or additional investment in RTBs, or additional resources for buying foreign exchange,” said Guinigundo.
Guinigundo said the Monetary Board this week will look at a possible RRR reduction as both an operational and monetary policy issue.
“It’s an operational issue because they say it’s a tax on financial intermediation therefore it is something that can be addressed. They are also saying that given our TDF as well as the authority given to us by law to be able to issue our own debt securities, now we have the flexibility to move away from such a monetary policy tool as the reserve requirement. We can do more market-oriented open market operations. At the same time you cannot also ignore the fact that every time you reduce the RRR you’ll be releasing P90 billion to P95 billion (per 100 bps) in liquidity,” he noted.
Guinigundo said it’s difficult to know how each of the Monetary Board members will decide on the RRR issue.
“It will depend where the Monetary Board will place the premium on what it wants to do. (Will it be) more on reducing it (RRR) because it’s a tax on financial intermetiation; or our confidence in our ability to mop up liquidity given the TDF and our authority to issue our own debt securities. Or, be more circumspect in your decision because you will have to reckon with the liquidity implication of a reduction in RRR,” Guinigundo added.
Both Diokno and Guinigundo said that reducing both policy rate and RRR is just a timing issue, however the former has also said that he will be reducing RRR from 18 percent to single-digit level before his term ends in 2023. He also announced last March that the BSP may cut RRR by one percentage point at least, per quarter.
Guinigundo has said that an untimely RRR cut will not help economic growth at all since it could lead to a weaker peso and impact on inflation outlook. This happened in 2018, he noted, when the additional liquidity released by the RRR reduction resulted in higher foreign exchange activity and significant weakening of the peso, which eventually “worsened” both actual inflation and inflation expectations.
Last Thursday however, Diokno said that the BSP will not be intervening in the foreign exchange market. “We do not intervene, we participate just to smoothen the fluctuations,” he told reporters.