By Lee C. Chipongian
Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said the BSP has committed to reduce banks’ reserve requirement ratio (RRR) when the time is ripe and not because the market wants it now.
Guinigundo, just back from the joint World Bank-International Monetary Fund annual Spring Meetings in Washington, said that a data-dependent and evidence-based BSP means they favor “gradualism” versus “market-dictated” liquidity infusion to correct a temporary tightness in money supply.
“The market should be more patient as it has been all these years,” said Guinigundo. He reminded banks that they have waited a long time for a BSP move even when there was what he called “ultra low interest rate environment” in the past. Again, he stressed: “It is no longer an issue of whether we should adjust the RRR level, but it is a question of timing.”
On when to cut the RRR, and particularly on the rate of reduction the market could expect, Guinigundo said it is “very difficult to say given the upside risks to inflation.”
“Policy direction is an issue because all other things considered because infusing the market with additional liquidity when inflation is yet to get back to the inflation target of two-four percent for 2019 and 2020 could be very challenging,” he said.
When the BSP last year cut the RRR by 100 basis points (bps) in February and another 100 bps, it released P190 billion into the financial system. Its impact was “fully neutralized” by the BSP’s auction-based open market operations and the move was re-tagged as an operational adjustment. In other words, excess liquidity has been reabsorbed by the central bank’s term deposit facility (TDF) and overnight deposit facility (ODF).
Guinigundo however cautioned that last year’s operational adjustment will have a different operating environment this year. “Having TDF and ODF facility is very useful but it remains demand driven and cannot be altogether an insurance that whatever is released thru lowering RRR can be… mopped up,” he said.
“This is the reason why we need to be very careful in this policy issue,” Guinigundo reiterated. “There is merit in gradualism, there is merit in depending on the data and evidence rather than being cavalier in just deciding on what appears to be market-dictated call for more liquidity in the system via RRR reduction,” he said.
Guinigundo has said earlier that an untimely RRR cut will hamper economic growth since it could lead to a weaker peso and will impact its inflation outlook as what happened in 2018.
When there was additional liquidity from the RRR reduction last year, the operational adjustment actually led to higher foreign exchange activity, which led to the peso depreciating further and resulting in a disanchored inflation expectation.
Guinigundo said price stability and a firm inflation expectation is a more urgent priority at this time than removing the “tax” on financial intermediation.
The BSP’s RRR at 18 percent is considered one of the highest level in the world. The BSP has committed to lower the RRR gradually. Last year, the RRR was reduced twice from 20 percent to 18 percent.