BSP watches PH liquidity levels as banks complain of ‘tightness’

The Bangko Sentral ng Pilipinas on Tuesday said that liquidity in the local financial system had declined in recent weeks, leaving banks with less investible cash and prompting calls for regulators to accelerate the timetable for reducing statutory bank reserves.

In an interview, BSP Gov. Nestor Espenilla Jr. said the tighter liquidity was caused, in part, by a P255-billion retail treasury bond issuance of the national government and the traditionally lower level of free cash in the banking system during the December and January months.

Nonetheless, the central bank stands ready to release more liquidity into the financial system — possibly by lowering the current 20-percent reserve that banks are required to set aside from their deposits — sooner rather than later.

“That’s one of the weapons in my holster,” Espenilla said, referring to the central bank’s tools for managing the amount of cash circulating in the banking system. As early as last year, he had indicated his desire to see the statutory reserve requirement be reduced to “single digit levels” to allow the extra cash to be funnelled to productive endeavors like funding the Duterte administration’s planned P9-trillion infrastructure buildup program.

The country’s top monetary regulator noted, however, that the timing of the reserve requirement reduction will depend on the assessment of central bank planners who are focused on keeping the prices of goods and services in check.

Releasing more cash into the financial system results in more money chasing the same amount of goods and services and, thus, causes prices to rise. This plan to lower reserves comes at a time when the Duterte administration just passed a package of tax hikes which the central bank expects to have a “short term” upward impact on domestic prices, especially those of food and petroleum.

Bankers estimate that the amount of “uncommitted” liquidity in the financial system had declined to below P500 billion in recent weeks from a high of P2.5 trillion a few months ago. Indications of tight liquidity include the central bank’s decision to cancel its 28-day term deposit facility which it used to siphon off as much as P140 billion from the market each week.

To counter this, banks are proposing that the BSP raise its key overnight rate to counteract the inflationary effects of reducing the reserve requirement — a proposal that Espenilla remained noncommittal on.

Regulators are concerned, however, that banks’ push for lower reserves and higher overnight rates is meant to give them more funds with which to earn higher interest rates at the expense of the BSP and domestic inflation.

Espenilla assured that BSP’s open market committee is monitoring the liquidity situation closely and which makes the appropriate recommendations based on the results of its weekly meetings.

“Besides, if banks really find liquidity tight, they can always reduce their lending activities,” he said.