Bank reserve requirement cut anew

Two weeks after tightening monetary policy in a bid to cap inflation, the central bank on Thursday announced a surprise 1-percentage point reduction in banks’ statutory reserve requirements that will effectively release more money into the financial system.

At the same time, however, Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. stressed that the two successive events are unrelated, and that the estimated P90 billion in liquidity that will be freed up into the financial system will immediately be siphoned off through the central bank’s weekly auctions.

“The calibrated reductions in reserve requirement ratios are not intended to signal any change in the prevailing monetary policy stance, as the BSP continues to have the scope to offset their potential liquidity impact via an expansion in auction-based monetary operations,” he said, describing the current scheme of cutting reserves but immediately siphoning off this very same excess cash by offering interest for banks to deposit these funds to the regulator.

The reduction will apply to those liabilities of all banks and financial institutions that are currently subject to a reserve requirement of 19 percent.

Espenilla descried the surprise move as being part of the central bank’s “broad medium-term financial market reform agenda” that “continues the BSP’s gradual and phased reduction in reserve requirement ratios that commenced in March 2018.”

These operational adjustments are part of the BSP’s shift toward a more market-based implementation of monetary policy that aims to gradually reduce the BSP’s reliance on reserve requirements for managing liquidity in the financial system, he explained.

The BSP believes that the shift to its auction-based monetary operations — referring to the weekly term deposit facility scheme — under the interest rate corridor framework has allowed it to provide “more effective” guidance to short-term market interest rates, which should help facilitate healthy price discovery on the cost of funds in the financial system.

“The reduction in reserve requirements is also part of the BSP’s broad financial sector reform agenda to promote a more efficient financial system by lowering intermediation costs,” the central bank chief said.

“Shifts in the monetary policy stance will continue to be signaled through adjustments in the policy rate, which will in turn continue to depend primarily on the BSP’s outlook for inflation as informed by economic data,” Espenilla said.

The reduction in the reserve requirement ratios will take effect on the reserve maintenance period beginning June 1, 2018. —DAXIM L. LUCAS