By Lee C. Chipongian
Banks’ reserves ratio will come down to eight to nine percent by mid-2023 from 18 percent today, Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla Jr. said.
“That’s my calculation, we will have nine percent (or lower) by the end of my six-year term,” said Espenilla. He has often said that he wants it lowered to single-digit level by 2023 but this was the first time he revealed that it could actually be lower than nine percent.
Espenilla said cutting reserve requirement ratio (RRR) from 20 percent to 18 percent this year is enough – and timely – and efficiently absorbed by its auction-based open market facilities, therefore there was no monetary policy impact. The 200 basis points off the RRR level released P180 billion to P190 billion into the financial system which were reabsorbed by the central bank’s term deposit facility.
However, the BSP’s open market operations’ (OMO) liquidity-absorbing functions have limitations.
“A 200 basis points a year reduction is (just right) because there is a limitation in absorptive capacity,” said Espenilla. “I will try to bring it to nine percent RRR at the end of my term. We are not setting a hard cut of 200 basis points per year because this is also opportunistic. But we will do it gradually,” he noted, adding that the BSP may not be able to effect more than 200 basis points cut every year or it will be too fast, and too much. He has hinted though that he is not ruling out a lower RRR – or below eight percent – in five years.
Espenilla has said that achieving single-digit RRR is attainable “without sacrificing effective monetary control” and that the market should be “guided accordingly in developing their long-term strategic plans.”
Espenilla said they could not have brought down RRR twice this year without alternative mechanisms to make the move policy neutral. He refers to the interest rate corridor which the BSP adopted in 2016 which allowed them room to reduce RRR as an operational adjustment.
He also said they have enough market-based tools to neutralize the impact of more RRR reductions.
Espenilla stressed that the RRR cuts do not lead to prolonged excess liquidity because of its OMO and foreign exchange operations.
These RRR reductions will free up funds that banks will no longer be required to reserve with the central bank. The two reductions in February and May have been applied to the reservable liabilities of all banks and non-bank financial institutions with quasi-banking functions.