Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said on Thursday, Aug. 18, that they will soon allow trust units of banks or stand-alone trust companies to buy BSP bills in the secondary market to counter the effect of higher excess liquidity.
This excess liquidity or money supply will come from an expiring Covid-related relief measure which authorized banks to use loans to micro, small and medium enterprises (MSMEs) and large enterprises that are not affiliated with conglomerates as alternative compliance with the reserve requirement (RR).
When this reserve eligibility measure expires, the BSP plans to reduce the RR ratio a month ahead or at the same time when the relief measure lapses on Dec. 31 this year.
However on Thursday, Medalla said they also had to consider the current high inflation scenario when reducing the RR ratio and even hinted to delay the reduction in RR ratio.
While an RR cut may or may not happen this year to offset the cessation of the reserve eligibility, the soon-to-be released circular allowing trust units to purchase BSP bills will counter the tightening effects of the expiring relief measure.
“Since we are postponing the compensating cuts in RR ratio to compensate for the expiration of the reserve eligibility of the loans to MSMEs, then effectively this will result in tighter monetary policy,” he explained.
The main concern for the BSP is bringing inflation back to target-consistent path as soon possible. Medalla said the objective was to prevent the tightening effect with a cut in RR ratio but that was based on assumptions of a different inflation picture.
“Our plan is to improve our ability to control money supply through our facilities in particular through the issuance of central bank bills. Right now the longest is 28 days,” he said.
Medalla said that to make it easier for trust department of banks and for stand-alone trust firms to be in the secondary market, they will issue a circular that will allow trusts to buy BSP bills in the secondary market.
“What we noticed is that in the past, when they were still big players in the special deposit accounts, the placement of the trusts were quite permanent and therefore effective forms of sterilization. So, we are moving in this direction. We’re going to issue a circular that will say trusts with minimal participation by non-residents will be allowed to buy central bank bills in the secondary market. When that happens, we will have greater confidence that whatever expansionary impact of cuts in reserve requirement happens, we could easily sterilize them by an equivalent issuance of central bank bills,” said Medalla.
The BSP chief reiterated that the BSP is still committed to bring down the RR to single digit level by next year. “The reason why we’re confident that although we’re postponing the compensation for the expiration of the reserve eligibility, eventually we will be able to bring down as promised the reserve requirements to single digit by the end of the term (in July 2023),” he added.
Banks’ loans as alternative compliance to the RR amounted to P277.6 billion as of mid-June.
The RR ratio is currently at 12 percent for big banks and 14 percent for non-banks with quasi banking functions. Thrift banks have three percent reserve ratio while rural banks have two percent.
Since a lower RR ratio reduces intermediation costs, the BSP wants to reduce the ratio to single-digit levels by 2023.