Cut in banks’ reserve requirement unlikely

The Bangko Sentral ng Pilipinas (BSP) would unlikely cut banks’ reserve requirement in the near term with inflation expected to peak by August, Deputy Governor Diwa C. Guinigundo said on Monday.

“Part of the reason for putting up the IRC (interest rate corridor) is to help reduce the reserve requirement. All things being equal, yes, we will do it. But today, what are the facts? The inflation rate is now doing 3.4 percent and 3 percent for 2017 and 2018, respectively. In fact, by August of this year, we expect inflation to be about 3.7-3.8 percent,” Guinigundo said in a forum organized by the Financial Executives Institute of the Philippines.

“If you’re in a situation when inflation is seen increasing until the third quarter of the year, is this the best time to reduce the reserve requirement? [It’s] a form of easy monetary policy. At this time, it’s not good to be talking about easy monetary policy when the inflation rate is surging. At the same time, you have as your backdrop the tightening of monetary policy in the US,” Guinigundo said.

The reserve requirement ratio stands at 20 percent, which means that for every P1 of deposit and deposit substitute generated by banks, regulators require that 20 centavos be set aside as buffer, representing the portion that banks cannot lend out.

“Once we’re in a more hospitable monetary and price condition, there’s no reason for the BSP to keep the reserve requirement up there,” Guinigundo said.

“There’s always a time for everything. The reduction in reserve requirement will come in the fullness of time,” he added.

Since June last year, the BSP conducts weekly term deposit facility (TDF) auctions as part of its implementation of the IRC, aimed at bringing market rates closer to the policy rate of 3 percent.

The TDF auctions mop up excess liquidity.