IMF: RRR reduction should be gradual

Published November 18, 2019, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

The International Monetary Fund (IMF) recommends a gradual easing of banks’ reserve requirement ratio (RRR) despite opportunities that a lower inflation environment offers the central bank to cut RRR faster than originally planned.

The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S. (Reuters file photo)
The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington, U.S. (Reuters file photo)

IMF Mission Chief Thomas Helbling said that while RRR’s significance as a monetary tool has diminished, and that it’s now considered an operational adjustment, the phase of its reduction should remain gradual.

As part of structural reform, a slow and even RRR reduction “is appropriate” said Helbling. The Bangko Sentral ng Pilipinas (BSP) has reduced the RRR by a total four percent or 400 basis points (bps) this year, from 18 percent to 14 percent by the first week of December.

At the rate it is going, the RRR will be in the single-digit level by next year, way ahead of the 2023 target date set by BSP Governor Benjamin E. Diokno, who adopted the single-digit RRR goal of his predecessor, the late Nestor A. Espenilla Jr. Espenilla, former deputy governor in-charge of banking supervision, slashed RRR last year by 200 bps.

Helbling, part of the visiting IMF officials who met with government officials for its annual assessment and review of the local economy, said: “On RRR our fundamental point is that as the BSP has moved to an interest rate corridor (IRC) system the reserve requirements have lost its relevance as a monetary policy instrument so we would see a gradual reduction over time to lower levels as appropriate in this case, because if (it’s a) less relevant monetary policy instrument, reserve requirments are no longer needed and it makes sense to reduce them because they are in a way, a tax to financial intermediation.”

He said that the current benign inflation environment “offers an ideal opportunity to undertake this – what we would call a structural reduction in the reserve requirement — and we will not see this so much as a monetary policy but more a structural move in line with the ongoing changes for the operation of the monetary policy framework.”

“So, given that we see this a structural adjustment, a gradual reduction I think is aproproate and also considering the broader financial market conditions (and) it can have short term market impact. We will just say a gradual reduction over time,” Helbling added.

The BSP said the RRR cuts serve its broad financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs. The adjustment also ensures sufficient domestic liquidity in support of economic activity, it said.

During the IMF Staff press briefing on Monday where it gave its preliminary assessment, Helbling said it is keeping its October GDP forecasts of 5.7 percent growth for 2019 and 6.3 percent for 2020 and these numbers are “underpinned by government spending catching up with targets, and the recent monetary policy easing.” The BSP has reduced key rates by a total 75 bps this year.

They also see a 1.6 percent end-of-the-year inflation for 2019 and three percent for 2020, while its average 2019 inflation forecast of 2.4 percent mirrors that of the BSP as well.

Helbling said the “near-term downside risks to the outlook have increased, reflecting increased risks from global trade tensions, shifts in global financial conditions, and natural disasters.”

“Macroeconomic policies have reacted appropriately to the slowing growth and
decreasing inflationary pressures. The planned increase in government spending for 2020 and the recent rnonetary policy easing will help the economy move back to its growth potential and achieve the inflation target,” he said.

In the meantime, the IMF maintains that the country’s medium-term economic outlook “remains favorable, especially if the strong structural reform momentum continues.”

“The recent cuts in the BSP’s policy rate are appropriate for achieving the inflation target in the next one to two years, barring any unforeseen events,” said Helbling. He also said that the Philippines “has space for an expansionary macroeconomic policy response should downside risks materialize.”