Amid a volatile peso-dollar exchange rate—conventionally countered by siphoning off liquidity from the markets—the Bangko Sentral ng Pilipinas yesterday said it wanted to inject more liquidity into the financial system to satisfy the demands of a growing economy.
In particular, BSP Governor Nestor Espenilla Jr. said he wanted to reduce the banks’ statutory reserves “to single digits” from their current level of 20 percent of total deposits held in their vaults.
The intended move underscores the new central bank chief’s counterintuitive liberal policies in response to market dynamics, after having spent decades building a career as a hawkish financial system regulator.
“What we are doing is watching the dials closely and respond appropriately,” he said, using the analogy of driving a car at the right speed. “What we see is that the local economy is growing and can use that liquidity. So we want to make sure there is enough cash [in the system] to meet the nonspeculative needs of the market.”
Espenilla earlier indicated his preference for a lower reserve requirement for banks to free up the idle cash for more productive uses like lending to job-generating company activities or to satisfy the homebuilding market.
The BSP chief, however, said the reduction would be gradual since it would be timed with the capital market reforms being implemented by the Duterte administration “over an 18-month timeframe.”
“This is the period we’re looking at,” he said, explaining that freeing up the cash from banks’ vaults was not likely to stoke inflationary pressures since current economic growth trends pointed to a legitimate need for funds by end users and not speculators.
Each percentage point of reserve requirement adjustment results in as much as P70 billion either being kept in or released from banks’ holdings. Thus, a reduction to single digit levels would release into the financial system more than P700 billion in cash over the medium term.
The planned de facto monetary policy easing becomes even more counterintuitive when viewed in the context of rising interest rates overseas—a phenomenon that is also expected to make itself felt locally at a milder pace.
Espenilla said monetary regulators were keeping their eyes on the country’s inflation rate and still believed the increase in prices of goods and services would average 3.2 percent from this year until 2019. The official inflation target remains at 2-4 percent between 2017 and 2020.