RRR liquidity impact should be sterilized – IMF
Published Feb 11, 2020 12:00 am
By LEE C. CHIPONGIAN
As the central bank resumes its gradual reduction of banks’ reserve requirement ratio (RRR), its impact on the financial sector’s liquidity should be “sterilized,” the International Monetary Fund (IMF) said in a country assessment report.
(AFP file)
“The RRR reduction should take credit conditions into account, and its liquidity impact may need to be sterilized,” said the IMF.
The IMF also said that since the RRR significance is not as important to monetary policy as before, procedures should be adjusted. “With a diminished role of the RRR, the reserve maintenance period could also be extended from the current one week to two-four weeks,” said the IMF.
Since the Bangko Sentral ng Pilipinas (BSP) can now issue its own debt instruments – following amendments to the BSP Charter – this further lessens the RRR role and allows for “a further refining of the operational monetary policy framework,” especially under the interest rate corridor (IRC) system.
“As the BSP can now issue its own securities under the revised central bank law, monetary operations would also benefit from coordination between the BSP and the government, in liquidity forecasting and in developing money and bond markets. In addition, the BSP could also consider a refined operational target, with the policy rate defined as a target for market rates, instead of a fixed rate on its overnight reverse repo,” the IMF recommended.
In a January-February Staff Report after its most recent Article IV Consultation with Philippine officials, it was noted that the BSP’s adoption of the IRC framework in 2016 has aligned short term market rates with the BSP rate.
“With this system and the move to Basel III liquidity requirements, the RRR has become less relevant as a monetary policy instrument. A lower RRR would reinforce the role of the policy rate as the primary monetary policy instrument and reduce intermediation costs,” said the IMF. Accordingly, it added that “the current benign inflation environment provides an opportunity to continue with the gradual lowering of the RRR while avoiding potential communication challenges that could arise if policy rates and the RRR moved in opposite directions.”
As a key forward guidance, BSP Governor Benjamin E. Diokno, has said that after the “rapid fire” RRR cuts in 2019 – a combined 400 basis points which released about ₱400 billion as fresh funds – he could now sit back and gradually reduce the reserve ratios. His plan is to bring it down to nine percent by mid-2023.
Reducing the RRR, the BSP said, serves 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 added.
(AFP file)
“The RRR reduction should take credit conditions into account, and its liquidity impact may need to be sterilized,” said the IMF.
The IMF also said that since the RRR significance is not as important to monetary policy as before, procedures should be adjusted. “With a diminished role of the RRR, the reserve maintenance period could also be extended from the current one week to two-four weeks,” said the IMF.
Since the Bangko Sentral ng Pilipinas (BSP) can now issue its own debt instruments – following amendments to the BSP Charter – this further lessens the RRR role and allows for “a further refining of the operational monetary policy framework,” especially under the interest rate corridor (IRC) system.
“As the BSP can now issue its own securities under the revised central bank law, monetary operations would also benefit from coordination between the BSP and the government, in liquidity forecasting and in developing money and bond markets. In addition, the BSP could also consider a refined operational target, with the policy rate defined as a target for market rates, instead of a fixed rate on its overnight reverse repo,” the IMF recommended.
In a January-February Staff Report after its most recent Article IV Consultation with Philippine officials, it was noted that the BSP’s adoption of the IRC framework in 2016 has aligned short term market rates with the BSP rate.
“With this system and the move to Basel III liquidity requirements, the RRR has become less relevant as a monetary policy instrument. A lower RRR would reinforce the role of the policy rate as the primary monetary policy instrument and reduce intermediation costs,” said the IMF. Accordingly, it added that “the current benign inflation environment provides an opportunity to continue with the gradual lowering of the RRR while avoiding potential communication challenges that could arise if policy rates and the RRR moved in opposite directions.”
As a key forward guidance, BSP Governor Benjamin E. Diokno, has said that after the “rapid fire” RRR cuts in 2019 – a combined 400 basis points which released about ₱400 billion as fresh funds – he could now sit back and gradually reduce the reserve ratios. His plan is to bring it down to nine percent by mid-2023.
Reducing the RRR, the BSP said, serves 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 added.