By Lee C. Chipongian
The Monetary Board has concluded that there is tight liquidity in the market as a result of the four-month delay in the national budget as it lowers banks’ reserve ratios to release P180 billion-P190 billion into the financial system.
Bangko Sentral ng Pilipinas Governor Benjamin E. Diokno said in a statement that, in reducing the Reserve Requirement Ratio (RRR) by 200 basis points (bps), this should address liquidity pressure concerns.
“The Monetary Board expects this (RRR) adjustment to help mitigate any tightness in domestic liquidity conditions due to limited public expenditure following the budget impasse in the first quarter of the year,” said Diokno.
The BSP will cut the RRR by 100 bps effective May 31, followed by 50 bps each on June 28 and July 26 for a total 200 bps, and slashing the ratio from 18 percent to 16 percent.
BSP Deputy Governor Diwa C. Guinigundo said the RRR discussion has always been part of the Monetary Board regular meetings, and part of an ongoing internal review to “map out the operational enhancements” of the interest rate corridor or IRC system, which enabled the shift to an auction-based open market operation three years ago.
Guinigundo said these regular discussions have always been directed at reducing the RRR, which they consider as a financial intermediation tax. Reducing the RRR, he added, is “consistent with the prevailing stance of monetary policy and in line with regional norms.”
Guinigundo said that based on the BSP’s consultations with banks – and the talks revolved around various operational refinements to the IRC system – the consultations were “generally well-received by market participants.”
“With the IRC system successfully in place and inflation returning firmly to the government target range (of two-four percent), the BSP has scope to move towards more market- based implementation of monetary policy,” he said.
“In particular, the successful implementation of the IRC system as well as the amendments to the BSP Charter, allowing the issuance of BSP securities, will provide the BSP added flexibility in deploying market-based instruments in its open market operations in order to absorb excess liquidity in the banking system.”
Guinigundo added that the BSP will continue to have a close watch on any tightness in liquidity, which he described as temporary and transitory in nature.
“The BSP will be guided by its latest liquidity forecasts and assessment of liquidity conditions in calibrating appropriately the volumes in its various liquidity facilities,” he remarked.
More RRR cut reviews in the future
The reduction in the reserves ratio from 18 percent to 16 percent will apply only to the reservable liabilities of universal and commercial banks with the BSP.
Diokno said they will be meeting again to decide on the RRR level for other banks. “The Monetary Board will review the potential cuts on the reserve requirements for other banks and non-bank financial institutions in the next round of reserve requirement adjustments,” he said.
Diokno said that, aside from recognizing tight liquidity conditions, they decided to adjust the RRR level because they were convinced it was the right time while inflation continued on its decline. As of end-April, inflation rate has averaged at 3.6 percent, within the target range of two-four percent.
“The BSP was also guided by the benign inflation forecasts of 2.9 percent for 2019 and 3.1 percent for 2020 (while) inflation expectations have likewise shown increasing convergence with the BSP’s inflation target,” said Diokno.
He reiterated that reducing the RRR is one of the BSP’s broad financial sector reform agenda to “promote a more efficient financial system by lowering financial intermediation costs.”