By Lee C. Chipongian
Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno said setting the timing in both policy rate and banks’ reserve ratio adjustments requires cautious review and should not be rushed.
“We are carefully considering when to resume the reductions in reserve requirement ratios (RRR), which would facilitate our shift towards our auction-based facilities for liquidity management,” Diokno said in a speech he delivered during the General Membership Meeting of FINEX and the Management Association of the Philippines.
Diokno also said that the BSP is currently reviewing the adoption of other operational refinements to “help ease intermediation costs for financial institutions.”
“Further, the BSP is also laying down the groundwork in terms of the operational and institutional requirements for issuing central bank securities as part of its policy toolkit,” he added.
The BSP’s amended charter – approved last February — has restored its ability to float its own bonds or stabilization bonds. “This should provide the BSP with greater flexibility in managing liquidity and in ensuring macroeconomic stability,” said Diokno.
Diokno said that as BSP’s fifth governor, he will make it a key priority to have a “speedy and effective implementation” of the new BSP law. “The law strengthens our policy framework for promoting price stability; enhances the framework for prudential regulation and systemic risk management to foster the safety and soundness of the financial system; and provides the BSP with the legal mandate to oversee payment and settlement systems,” he told the FINEX/MAP forum. “To operationalize the law, BSP units are now working on action plans covering their specific areas of concern while specific guidelines on the law’s implementation shall eventually be issued through BSP circulars.”
In the same forum, Diokno has reiterated one of his earlier pronouncements that he will be reducing RRR from 18 percent to single-digit level before his term ends in 2023.
The RRR which Diokno said was a form of tax on banks should be reduced to allow banks some leeway. Within days of his appointment last March 4, Diokno said he wants to accelerate the RRR reduction and bring it to single-digit level even before the end of his term. Also last month, he announced that the BSP may cut RRR by one percentage point at least, for the next four quarters.
The BSP has started its review of the financial system’s preparedness for another RRR cut, and if the auction-based open market operations could absorb a possible similar rate of RRR reduction in 2018 which was 200 basis points.
Banks have been clamoring for another RRR cut to free up funds that they could either lend out or place with the BSP’s interest-earning facilities.
Bank of the Philippine Islands (BPI) president and CEO, Cezar P. Consing, said a lower reserves ratio will spur growth. “I am looking forward to the BSP being able to lower reserve requirements. That will mean that we will be able to lend out a larger percentage of the funds that we have. That’s good for us and, more importantly, it’s good for economic growth,” said Consing.
He also said that the Philippines has the highest reserve requirements in the region. “They were set at a time when the banking system wasn’t as strong as it is now. Today, I think we can afford to align closer to our regional peers,” said Consing.
BSP Deputy Governor Diwa C. Guinigundo said earlier this month that an untimely RRR cut will not help economic growth at all since it could lead to a weaker peso and impact on inflation outlook.
This happened in 2018, he said, when the additional P190 billion liquidity released by the RRR reduction resulted in higher foreign exchange activity and significant weakening of the peso. “That also worsened both actual inflation and inflation expectations. This outcome is not impossible to happen again this year,” Guinigundo added.