BSP to offset inflationary effect of reserve cut

The central bank’s decision to reduce banks’ statutory reserves will not aggravate the rising prices of local goods and services that have already been on an uptrend due to the Duterte administration’s tax hikes that took effect this year.

Thus said Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr., who said that monetary planners have mechanisms to neutralize the estimated P90 billion in liquidity that last week’s 1-percentage point reduction in the reserve requirement will release into the financial system.

“We will absorb back [the cash] through the term deposit facility,” he said, referring to the central bank’s weekly tender where it offers banks interest payments for short-term deposits of their idle cash.

Last week, the BSP announced an increase in the size of this facility to P110 billion for its Feb. 21 tender from the previous week’s P80 billion and only P40 billion a week in January.

“Remember, this is an operational adjustment, not a monetary policy move,” Espenilla said, stressing that he did not want financial markets to worry about potential inflationary effects of the reserve requirement cut—the first of what is expected to be a series of reductions until banks’ statutory reserves fall to the “single-digit levels” of comparable Asean economies.

The BSP chief had earlier said that lower bank reserves would free up more cash that could be used more productively, including the funding of the government’s proposed P9-trillion infrastructure program aimed at modernizing the country’s airports, highways, railways and other transportation systems.

But the recent spike in the inflation rate—which hit a three-year high of 4 percent last month —have made central bank planners “deemphasize” the move to release more funds into the economy and have, in fact, heightened calls for tighter monetary policy to contain the price hikes.

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