Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said Thursday the Monetary Board will keep the reserve requirements ratio for banks at 18 percent this year while waiting for the inflation rate to return to the target range of 2 percent to 4 percent.
Espenilla made the statement a day after the International Monetary Fund said the BSP should consider the idea of pausing for the meantime further reduction in reserve requirements to improve communications and wait until inflation was on a downward path.
“We’ve done enough with 200 bps [basis points] in total RRR cuts this year in line with the strategy to implement this important financial sector reform over the medium term in a gradual and phased manner,” Espenilla said in a response to a query regarding the IMF comment.
“This initiative can resume next year just as inflation returns to target based on our forecast,” Espenilla said.
He said the goal of achieving a single-digit RRR by the end of his term remained “quite attainable without sacrificing effective monetary control.”
The IMF’s comment on RRR was contained in a statement after a team visited Manila and Bohol on July 11 to 25. IMF mission chief Luis Breuer said the IMF supported the Bangko Sentral’s move to reduce the RRR for banks, which was part of an overall financial sector reform agenda.
The IMF staff, however, suggested enhanced communications of the rationale behind the reform for better market understanding and for the BSP to calibrate the timing of further cuts in the RRR to consider progress in lowering inflation.
Espenilla said cutting RRR by 200 basis points this year already sent a credible and concrete signal to the financial system of BSP’s commitment to structural reforms so the industry could be guided accordingly in developing their long-term strategic plans.
The Monetary Board, the policy-making body of the Bangko Sentral, cut for the second time this year the reserve requirements ratio of banks by one percentage point, from 19 percent to 18 percent in May 2018, as part of moves to effectively manage liquidity in the financial system. The first 100-bps cut took place in February.
The reduction applied to those reservable liabilities of all banks and non-bank financial institutions with quasi-banking functions that are currently subject to a reserve requirement of 19 percent.
The board said the shift to the auction-based monetary operations under the interest rate corridor framework allowed the BSP to provide more effective guidance to short-term market interest rates, which should help facilitate healthy price discovery on the cost of funds in the financial system.
The board announced a one-percentage-point cut in the reserve requirement ratio of banks from 20 percent to 19 percent.
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.