BSP awaits opportunity to cut reserve requirement

MANILA, Philippines — A day after hinting at an interest rate cut in August, Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. suggested that the economy might be in need of a further shot of liquidity as he recognized that financial conditions are tighter than necessary.

In an interview with Bloomberg on Friday, Remolona reiterated his wish to reduce banks’ reserve requirement ratio (RRR) to 5 percent from 9.5 percent, still higher than most peers in Southeast Asia.

READ: BSP hints at policy rate easing by August

Remolona’s wish goes back to when he took over as central bank chief last year, telling journalists at the time that, ideally, the RRR should be “zero” like in the United States.

But Remolona said the RRR cut could not happen while the BSP was still hawkish.

“We’re still seeing the effect of the October rate hike. That’s why we feel we’re still hawkish,” Remolona said.

Goal: Cut RRR to 5% from 9.5%

“We’re beginning to see a negative output gap. That means it’s possible we’re beginning to be tighter than necessary for taming inflation. But these numbers are all imprecise. We need to use some judgment in deciding whether to ease or not,” he added.

RRR refers to the percentage of deposits that banks must set aside as standby funds that do not generate returns. This is to ensure that they are able to meet liabilities in case of sudden withdrawals.

By slashing the RRR, the BSP is allowing banks to deploy more funds, freeing up billions of peso in loanable funds to the economy

In the same interview, Remolona said the RRR reduction would unlikely happen during a monetary policy meeting.

“We would like to reduce the reserve requirement by quite a bit, because I think it’s distorting financial intermediation,” he said. “But the timing is important.”