Tame inflation prompts RRR reduction

By Lee C. Chipongian

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Francisco G. Dakila Jr. said yesterday the decelerating inflation momentum has allowed the Monetary Board to continue reducing banks’ reserve requirement ratio (RRR) in an “accelerated” manner.

MB file photo. MB file photo.

With an inflation outlook that is expected to remain within the government target range of two-four percent until 2021, the BSP may find more opportunities to adjust RRR faster in the next year or two.

When asked if possible to get to a single-digit RRR level way ahead of the 2023 schedule which was the timetable being followed by BSP Governor Benjamin E. Diokno, Dakila said the announcement to reach single-digit level by the end of Diokno’s term stands but that the BSP will take advantage of any opportunities such as continued low inflation in deciding RRR levels.

“The adjustments to RRR has been accelerated because it is the opportune time (to do it with) inflation (that’s) quite low,” said Dakila. Also, the BSP’s open market operations such as the weekly auction of the term deposit facility and other policy instruments are on hand to fully absorb the extra liquidity that the RRR cuts will release.

The Monetary Board reduced the RRR by 200 basis points (bps) as of end-July. Last September 27 it decided to reduce the RRR by another 100 bps by the first week of November and on Thursday, it said another 100 bps cut will be implemented by the first week of December.

Dakila said they are closely monitoring liquidity conditions after the first 200 bps cut and reviewing the implications of the current adjustments of RRR on liquidity.

He said that it is a significant consideration that inflation outlook remains benign and that liquidity growth is steady. With a recovering government spending in the last two quarters of the year, they expect acceleration of liquidity growth as 2019 nears its close. As for inflation, the average rate further dropped to 1.7 percent in the third quarter from three percent in the second quarter. The BSP forecasts 2.5 percent inflation for 2019 and 2.9 percent in 2020 and 2021.

BSP Department of Economic Research Director, Dennis D. Lapid, said the phase of the RRR reductions is guided by the BSP's medium-term plan or agenda to reduce financial intermediation costs. “At the same time, we’re reconfiguring (the way we do) monetary policy… to do more market-base instruments and eventually, our own government securities,” he said. The central bank is preparing to issue its own bonds as early as the first quarter next year.

ING Bank senior economist Nicholas Mapa said since the BSP “had moved away from using RRR to signal its policy stance” future RRR cuts “should be viewed as operational in nature.” This is what the BSP has been communicating to the market since 2018.

“The next rounds of easing (total of 200 bps in November and December) will likely help ease chronic tightness in liquidity but may do little in addressing the sluggish growth momentum posted in the second quarter GDP. To date, additional funds freed up by the initial 200 bps worth of RRR reductions had been diverted to the local bond market with very little impact noted in bank lending so far,” said Mapa.