REMOLONA

After reducing the bank’s reserve requirement ratio (RRR) to a single-digit level last year, the Bangko Sentral ng Pilipinas (BSP) yesterday said it is planning another substantial cut this year.

Eli Remolona, BSP governor and Monetary Board chief, said they will reduce reserve requirements “substantially this year and then there may be further reductions by next year.”

“I have promised a cut in the reserve requirement. We’ve discussed the timing of it. I would say it’s going to happen this year,” Remolona said.

RRRs are funds that a bank holds in reserve to ensure that it is able to meet liabilities in case of sudden withdrawals. Consequently, RRRs are used by central banks to increase or decrease the money supply in the economy and influence interest rates.

In June of last year, under then Gov. Felipe Medalla, the BSP reduced RRRs to “ensure stable domestic liquidity and credit conditions” as relief measures implemented during the pandemic were due to end.

RRRs are currently at 9.5 percent for big banks, 6 percent for digital banks, 2 percent for thrift banks and 1 percent for rural and cooperative banks.

Before last year’s reduction, RRRs were also reduced in 2020 to help cushion the impact on the financial system of the coronavirus pandemic.

It is estimated that for every 1 percent cut in RRRs, P130 billion is released to the country’s financial system. That’s billions of pesos more which could be used for lending activities, government securities, equities and forex, among others.

“There’s a funny dynamic that’s going on. We’re trying to manage that. But the idea is to reduce the reserve requirements substantially,” Remolona said.

“In terms of liquidity, the reserves for the reserve requirement are on our balance sheet on the same side, on the liabilities side. So if we cut that, if we cut the reserve requirement, that part will go down and we want to compensate for that by absorbing back some of that liquidity, which will go into some other part of our balance sheet,” he added.

“There will be an impact (on the economy). It won’t be immediate. Our transmission mechanism has long lags. That’s partly because the markets are not deep and liquid. We take account of those lags. At the same time, we’re trying to improve the liquidity of the markets to shorten those lags. But that’s an effort that will take some time,”

Remolona also said.

If and when the reserve requirement is adjusted downwards, Zeno Abenoja, BSP assistant governor, said they hope “additional liquidity will be deployed to help expand productive economic activities.”

“However, that will take time. So some of it will be deployed by banks in various financial markets, including GS, and equity. But some of it may still reside in their accounts, including depositing it back to the BSP. So there is the expectation that the volume of operations may increase over the near term as the banks prepare to deploy these funds productively into their fund, invest it or put it in their loan portfolio. But also, the volume of the entire operations, including the BSP bills, may expand to help manage this liquidity that will be released to the system. That’s how we view what could happen over the near term,” Abenoja said.

Remolona added they have no plans to issue longer-term securities beyond the existing 28- and 56-day tenors issued by the central bank.

“We have no plans. We have no plans for that. So now it’s just a liquidity issue. Longer term bonds are for the financing of, say, government operations, but what we are doing now is purely a liquidity effort,” Remolona said, noting that the central bank wants “deeper and more liquid markets.”  

“The yields tell us something about the economy, they tell us something about monetary policy, whether there’s a transmission mechanism in monetary policy. Markets are like a horse race. What makes for a horse race is a difference of opinions. People bet on different horses. In a market, the more differences in opinion there are, the more liquidity there is, and the more trading. The differences in opinions are reconciled in the market. There’s a consensus that is built in the market that people trade. That’s what we want,” Remolona said.