BSP wants single-digit reserve requirement ratio

THERE IS SIZEABLE ROOM to trim big banks’ reserve requirement to as low as single-digit levels from 20% currently, the central bank chief said, even as he noted that such a move will have to be timed carefully alongside tweaks to interest rates.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said plans to cut the reserve requirement ratio (RRR) imposed on banks remain live, noting that he would like to see a substantial reduction over the coming years.

“The RRR is something that I would like to personally see to single-digit level,” Mr. Espenilla told reporters on the sidelines of the 43^rd Philippine Business Conference & Expo at The Manila Hotel.

“But there is a game plan for it. Our game plan is to do it in such a way to avoid the situation that we are unleashing too much liquidity that the economy is unable to absorb.”

Currently, banks must set aside a fifth of their total deposit base with the BSP, an amount which they cannot hand out as loans. These funds are effectively left idle and do not generate returns for the lenders.

The 20% RRR was last set in May 2014 and is among the highest in the world.

Mr. Espenilla previously described the hefty reserve standard as an “inefficiency to the financial system” and vowed to push for its reduction as he took over the central bank’s helm in July.

While refusing to provide a specific timetable for such changes, the BSP chief said such adjustments may be introduced at a time of reduced money supply in the domestic financial market.

“Liquidity can be reduced by more outflows from the economy,” Mr. Espenilla said.

“That’s a good time to inject liquidity by lowering reserves.”

He added that reforms to deepen the local debt market scheduled over the next 18 months would also set the stage for a possible RRR cut.

He said the reserve standard will be trimmed “in stages” rather than in one go.

Meanwhile, Mr. Espenilla said current conditions do not call for any adjustments to monetary policy rates, with inflation seen at bay and the exchange rate remaining flexible despite the peso’s depreciation versus the dollar.

“Our (inflation) forecast for 2017 is 3.2% and I think we will be able to hit that… So by itself, that is not a driver for us. There is no compelling reason for us to immediately change monetary policy,” the central bank chief said.

Mr. Espenilla said inflation is expected to hover “around 3.4%” in the last three months of 2017 to match the peak hit in September, but this is not a cause of concern for the central bank since this pace still falls within its 2-4% target band for 2017. This would likewise pull the inflation average to match the forecast, with the current nine-month tally at 3.1%.

The peso’s recent depreciation has been “moderate,” Mr. Espenilla said, supporting stronger remittance inflows — and therefore household spending that fuels more than three-fifths of the country’s economy — and export valuation.

Pressures from a balance of payments deficit are also seen “under control,” with the BSP chief attributing the trade-in-goods gap to increased importation for investments as the Philippine economy expands.

The BSP will again assess monetary policy settings on Nov. 9. The central bank has kept its policy stance steady for the last three years, except for procedural adjustments in June 2016 that paved the way for migration to an interest rate corridor system that has the overnight deposit rate at 2.5%, the overnight reverse repurchase rate at 3.0% and the overnight lending rate at 3.5%. — Melissa Luz T. Lopez