The Bangko Sentral ng Pilipinas is considering the resumption of reserve requirement reduction, following the deceleration of inflation rate which is expected to settle within the target range of 2 percent to 4 percent this year.
Bangko Sentral Governor Nestor Espenilla Jr. in a speech read by Deputy Governor Chuchi Fonacier during the annual reception for the banking community on Jan. 25 said the bank 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 to 4 percent target this year and in 2020,” his statement 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 for treatment on tongue cancer that was diagnosed in the latter part of 2017.
He said 2018 was an exceptional year for the Bangko Sentral in pursuit of bold financial sector reforms. He said the regulator introduced several refinements in the Interest Rate Corridor system which provided BSP with greater operational flexibility.
With the resulting firm anchoring of market rates to the IRC, Bangko Sentral was able to reduce reserve requirements ratio by a total of 200 basis points as operational adjustments.
“This keeps us on track of the medium-term goal of a phased and gradual approach in reducing RRR to single-digit level,” Espenilla 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 must be held by a commercial bank.
The policy-making Monetary Board of Bangko Sentral made a one-percentage point cut in the reserve requirement ratio of banks from 20 percent to 19 percent in February 2018. The regulator followed it up with another one-percentage point cut in May 2018 from 19 percent to 18 percent.
The Monetary Board said the BSP attained sufficient progress in its shift towards the use of market-based monetary instruments since the adoption of the interest rate corridor framework in June 2016.
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 as the immediate measures implemented by the government to curb the faster increases in consumer prices took effect.
This brought the average inflation in 2018 to 5.2 percent, beyond the target range of 2 percent to 4 percent for 2018.