The central bank will temporarily pause its policy of reducing the amount of cash that banks must hold in reserve to focus on fighting inflation, which currently stands at its highest level in at least five years.
In a statement, Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said bank regulators “have done enough” after reducing banks’ statutory reserve requirements by two percentage points this year.
“This initiative can resume next year just as inflation returns to target based on our forecast,” he said through a note sent to reporters via instant messaging on Thursday.
Espenilla wants to reduce banks’ reserve requirement ratios to single digit levels to allow the local economy to make better use of the funds that are otherwise kept unproductive in bank vaults. But his initial moves — two one-percentage point cuts, with the most recent cut coming a week after the central bank raised interest rates — have caused confusion among banks who questioned the timing of the reserve reductions amid record high inflation.
The BSP chief explained that the reductions were “in line with the strategy to implement this important financial sector reform over the medium term in a gradual and phased manner” and that the additional liquidity that the reserve cuts released into the financial system were mopped up by the central bank’s open market operations.
An estimated P180 billion in cash was released into the local economy by the twin reserve cuts which were, in turn, recaptured by the BSP through its weekly term deposit facility auctions, where it paid banks interest in exchange for depositing idle funds back with the regulator.
On Wednesday, the International Monetary Fund — at the end of its annual review of the Philippine economy — chimed in on the central bank’s antiinflation policies, saying more aggressive moves would be needed to cap rising prices of goods and services locally.
Speaking to reporters, IMF mission chief Luis Breuer said he supported a pause in the reserve requirement reductions since it “led to some communications challenges.”
The BSP had earlier insisted, however, that the reserve cuts should not be viewed as part of the central bank’s monetary policy operations. The regulator noted that, even at the current level of 18 percent, the Philippine bank reserve requirement was still one of the highest in the world and was effectively a tax on the Philippine economy that needed more resources to grow.
“Cutting the reserve requirement ratio by 200 basis points this year already sends a credible and concrete signal to the financial system of BSP commitment to structural reforms so the industry can be guided accordingly in developing their long-term strategic plans,” Espenilla said.
“The goal of achieving single-digit reserve requirement ratios by the end of my term is therefore quite attainable without sacrificing effective monetary control,” he added.