BSP to pursue RR cuts in 2H

The plan of the Bangko Sentral ng Pilipinas (BSP) to reduce banks’ reserve requirements (RR), even after adjustments to the key rates possibly in June, will not affect the Monetary Board’s policy stance, according to officials.

The local financial market is anticipating a BSP policy rate cut when it meets on June 24, but expected the May 19 Monetary Board policy decision to maintain rate at two percent.

Thus, the planned RR reduction around that time or in the second half as raised by SP Governor Benjamin E. Diokno may confuse the market. Reducing the RR ratio is an easing of monetary policy.

BSP officials, however, explained in an email to Manila Bulletin that the planned reduction in reserve requirement ratios is not meant to signal any change in the BSP’s policy stance. Rather, BSP officials said the move is intended to be an operational adjustment to facilitate the BSP’s shift to market-based instruments for managing liquidity in the financial system, particularly the term deposit facility and the BSP securities, which allow the BSP’s monetary actions to have greater traction over market interest rates.

“Nevertheless, the timing of the reduction in RR ratios will also carefully consider the evolving outlook for inflation,” central bank officials added.

In addition, the BSP said that in considering monetary action under the current environment, it will “strive to find a balance between preventing the buildup of inflationary pressures and risks to financial stability while providing adequate stimulus to economic growth, in line with the BSP’s primary mandates.”

The BSP’s Monetary Board has kept the two-percent benchmark rate during its first two policy meetings last Feb. 17 and March 24 this year. The next two upcoming monetary policy meetings are scheduled on May 19 and June 23, its third and fourth policy meetings. The Monetary Board has a total of eight policy meetings in a year.

The main objective of BSP’s monetary operations is to control and manage inflation which the BSP as of March 24 forecasts will average at 4.3 percent for 2022, higher than its February 17 estimate of 3.7 percent. For 2023, the BSP forecasts a higher inflation rate of 3.6 percent from its previous projection of 3.3 percent.

The Monetary Board approved a 400 basis points (bps) cut to RR ratio in 2020 but the BSP only reduced the ratio by 200 bps, seeing no further need to use up the entire 400 bps authority to slash the RR ratio.

Since a lower RR ratio reduces intermediation costs, the BSP wants to reduce the ratio to single-digit levels by 2023. The BSP’s RR ratio of 12 percent for big banks and 14 percent for non-banks is considered one of the highest in the region.

The BSP’s primary monetary policy instrument is the interest rate on its RRP facility. But BSP has the option to reduce banks’ RR ratio and its weekly auctions for the term deposit facility and the BSP securities facility.

Diokno said in early April that they may reduce the RR ratio by the second half of this year, in time for an expected GDP higher growth.

Last year, total placements in the BSP’s monetary facilities amounted to P1.9 trillion versus P2 billion in 2020. These bank placements were in the RRP facility, overnight deposit facility, term deposit facility, and BSP securities which accounted for 15.9 percent, 37.5 percent, 32.9 percent, and 13.6 percent, respectively, of the total amount of liquidity absorbed by the BSP.

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