BSP chief: Bank reserves may be halved ‘eventually’

MANILA  -Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. wants to bring down the reserve requirement on banks—which at 9.5 percent is still higher than most peers in Southeast Asia—possibly starting later this year when consumer price risks have subsided.

Remolona said that, ideally, the reserve requirement ratio should be “zero” like in the United States.

When asked how low it realistically could go in the Philippines, he said “eventually” 5 percent would be possible.

In a previous meeting with bankers, the new BSP chief had signaled this goal to significantly reduce the ratio, which is computed against banks’ deposits and deposit substitutes and therefore represents the amount of money that can’t oil the economy while simultaneously increasing the intermediation cost of banks.

On banks’ desire to see a 5-percent ratio, Remolona said he had not stated any such hard target but agreed that this level would be “eventually possible.”

“It’s not a monetary policy move but the timing of it should not detract from monetary policy. So if we’re tightening, we shouldn’t lower the reserve requirement. But that’s my goal: to lower the reserve requirement eventually when the time is right,” he said in a chat with editors on Tuesday night.

Although the BSP has significantly reduced the reserve requirement in recent years, the ratio remained much higher than the levels seen elsewhere in the region. The ratio is only at 2 percent in Malaysia, 1 percent in Thailand and 3 percent in Vietnam. The country’s ratio is comparable with Indonesia’s 9 percent.

Not a monetary tool

Here in the country, Remolona said there’s still that perception that reserve requirement was an effective tool to control money supply. While the new BSP chief agrees that inflation targeting remains the appropriate framework for an emerging market like the Philippines, he suggests the need to study the merits of this mechanism as part of the monetary arsenal. He favors freeing up more of the money that banks otherwise have to keep as reserves and if necessary, just mop up if there’s any excess liquidity using the BSP’s overnight reverse repurchase facility.

The first reserve requirement reduction under his term as central bank chief may happen “later in the year” when it ends its monetary tightening cycle. For now, the BSP is not in a rush to cut interest rates.

“We’re in, I would say, a hawkish stance, which means either we pause or we raise [interest rates]. For the time being, that’s where we are because we are not yet within the [inflation] target range. When that starts to look okay, we can begin to think of easing, but that’s not on our radar screen at the moment,” Remolona explained.