BSP weighing reduction of bank reserves

Bangko Sentral ng Pilipinas Deputy Governor Diwa Guinigundo said monetary authorities are closely monitoring the situation to see if there is a need to resume the reserve requirement reduction and avoid confusing the market.

Guinigundo said while there was always a room for adjustment of the reserve requirement, important conditions should be observed.

“So we are very careful in looking at various indicators that would tell us that while we have the room for a reduction in the RR, it is still high at 18 percent. But the more important, more basic question is, when do you do that,” Guinigundo said at the sidelines of the oath-taking ceremony for the new set of officers of the Economic Journalists Association of the Philippines held at China Bank building in Makati City Friday night.

BSP Deputy Governor Diwa Guinigundo
BSP Deputy Governor Diwa Guinigundo
Guinigundo said the forecast for inflation was firmly within the 2 percent to 4 percent target of the BSP.  He said any slowdown in inflation would not mean the central bank would immediately cut the reserve requirements of banks.

“The [inflation] forecast for the current year and for the following year should be consistent with the target... I was saying earlier, you really need to have conditions that would warrant a reduction in RR. This means you really have a really tight liquidity condition,” he said.

He said the other factor to watch out for was if interest rates were beginning to go up.

“We don’t want to release signals that could be contradictory to each other and confuse the market in the process. It is always on the table of the monetary board. The technical staff continues to study the indicators and we will report to the monetary board such a space if it exists already at that point in time,” Guinigundo said.

He said the Monetary Board’s decision to keep policy rates steady during the Dec. 13, 2018 meeting after successive rate hikes since last May was providing some space to review what happened. 

The board raised by a total of 175 basis points the overnight policy rates last year in a bid to curb the rising inflation rate. Inflation peaked at a nine-year high of 6.7 percent in October before easing to 6 percent in November and 5.1 percent in December.

This brought inflation to a full-year average of 5.2 percent, above the target range of 2 percent to 4 percent for the year.

“So it is hard to say that we can cut the reserve requirement or even the policy rate after making one or two observations only. It will not only confuse the market  but will also affect the flow of policy... that is a bad policy,” he said.

The reserve requirement or cash reserve ratio is a central bank regulation employed by most, but not all, of the world’s central banks, that sets the minimum amount of reserves that should be held by a commercial bank.

Bangko Sentral Governor Nestor Espenilla Jr. earlier said monetary authorities were studying the possibility of resuming the reduction of reserve requirement reduction following the deceleration of inflation rate.

Espenilla said in a statement the Bangko Sentral remained on track of the medium-term goal of a phased and gradual approach in reducing the reserve requirement ratio of banks to a single-digit level. 

“Our latest forecasts indicate that inflation will return to the 2-4 percent target this year and in 2020,” he said.

“ We now see scope for further reduction on the RRR as we see inflation returning firmly to within target and with inflation expectations stabilizing,” Espenilla said.

Espenilla is currently on an extended medical leave as he is continuing his treatment for a tongue cancer that was diagnosed latter part of 2017.

Topics: Bangko Sentral ng Pilipinas , BSP Deputy Governor Diwa Guinigundo , bank reserves
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