Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno is not ruling out more cuts to banks’ reserve requirement ratio (RRR) this year that would flood more money supply or liquidity sloshing around the financial system.
“Further cuts on the RRR remain on the table but it could depend on the evolution of domestic liquidity and credit dynamics in the coming months,” said Diokno during the virtual press briefing after the Sulong Pilipinas 2021 forum.
Diokno said any action on the RRR will be guided mainly by the inflation outlook which for him remains manageable. “At this point there is enough liquidity in the system but the manageable inflation environment provides the BSP some room for further reductions in RRR if needed to bring down the intermediation costs for banks and reduce borrowing costs for clients,” he added.
In Diokno’s forum presentation, he reiterated that banks are adequately capitalized and have low exposure to bad debts, and that despite the weak loan demand, the banking sector can support the economy, especially micro, small and medium enterprises (MSMEs) by providing sufficient credit and other financial services. Last year, the BSP has injected P2 trillion of liquidity as part of its anti-pandemic response.
“The favorable inflation outlook and well-anchored inflation expectations allowed us to inject money into the economy without fear of causing unmanageable spike in consumer prices,” he told forum participants.
Part of BSP anti-pandemic measures is to reduce the interest rates by 200 basis points (bps) and to cut RRR to 12 percent from 14 percent to shore up market confidence and to make sure there are adequate liquidity and credit while battling the health crisis. The Monetary Board approved a 400 bps cut to RRR in 2020 but the BSP only reduced the ratio by 200 bps, seeing no further need to use up the entire 400 bps authority to slash the RRR last year.
Diokno also said in his presentation that even with the COVID-19 health crisis, the government will restart its pre-pandemic target of becoming an upper-middle income economy. Before the pandemic, the government’s original schedule of achieving a higher income status is mid-2023. “We intend to go back to that trajectory even amid the pandemic,” he said.
In the meantime, he again said that the BSP will keep an accommodative monetary policy stance while the economy is recovering from the COVID-19 crisis. With the vaccine rollout, he also thinks the economic crisis is nearing its end and an expansionary monetary support will ensure recovery stays on its course.
“We recognize that the economy is still in its nascent recovery phase,” said Diokno. “The accommodative monetary policy settings provide significant stimulus to demand and should be allowed to continue to work their way through the economy to bolster recovery in private consumption and investment.”
For the moment, the BSP has started its comprehensive review of the right timing of scaling back the size of liquidity and COVID-19 relief measures to avoid financial distress post-pandemic. It is a cautious voice the BSP chief has often adopted. “Doing this too late or too early may have serious repercussions on the economy,” he has said.
The biggest of the BSP liquidity support was in the government securities market. So far, central bank purchases have accounted for 5.60 percent of GDP, followed by non-traditional BSP provisional advances to the National Government which was about three percent of GDP. The latter is an extraordinary BSP provision in the amount of a fresh P540 billion cash advance in January, on top of traditional monetary interventions and regulatory relief measures
The liquidity released due to RRR cuts in 2020 accounted for 1.17 percent of GDP. The 200 bps policy rate cuts, on the other hand, translated to liquidity equivalent to 0.29 percent and BSP’s P20 billion dividend remittances to the government is another 0.11 percent.