‘RRR as signal tool no longer as useful’

The usefulness of the banks’ deposit reserves as an important signaling tool  has greatly diminished in recent years, the Bangko Sentral ng Pilipinas  (BSP) reiterated this point in a statement issued on Thursday.

BSP Governor Nestor A. Espenilla Jr. said the link between the banks’ reserve requirement ratio (RRR) and the monetary climate they try to create with it has since severed and has, in fact, been replaced by an entirely different set of policy tools.

As a result, Espenilla said on Thursday deposit-reserve adjustments in the future should not be interpreted as a change in monetary policy stance because clearly they are not.

Espenilla acknowledged that while the BSP in the past relied on RRR adjustments to foster a particular monetary climate in the recent past, such linkage is now a thing of the past.  He said the BSP now has a better grasp in managing domestic liquidity conditions such that prices across the $305-billion economy respond accordingly and local output is more or less assured.

“RRR is one of the traditional monetary-policy instruments available to BSP. We have heavily relied on it for a long time to run effective monetary policy in a situation of underdeveloped banking and financial markets and limited Central Bank open-market operations. This is no longer the case in the Philippines. Therefore, continued heavy reliance on RRR has become highly burdensome and distorts the financial system,” Espenilla said.

The RRR is that portion of the banks’ funds that must be held in reserve in the vaults of the BSP and may not be used for lending. Their effective capture allows the BSP to calibrate the volume of money in general circulation.

The RRR currently stands at 20 percent, considered one of the highest in the region and had been in place since May 2014.

In its place, Espenilla said, in a new policy framework called the interest-rate corridor adopted in 2016 that allows the BSP to more effectively manage liquidity conditions in a more market-friendly manner.

When it was first implemented, the BSP said the medium-term goal was to bring the banks’ RRR to a more competitive level, ideally to single-digit ratios.

“This is the logic behind the plan to gradually phase down the RRR to single-digit levels comparable to those prevailing in Asean countries of more or less similar development. This means that forthcoming reductions in RRR should not be mistaken as a change in monetary policy stance. Rather, it should be viewed as part of ambitious financial market reforms that the BSP is currently implementing,” Espenilla told reporters.

Some of the stakeholders have expressed their apprehension over the anticipated cut in the banks’ deposit-reserve requirement given that such would quickly flood the system with incremental liquidity that could stoke inflation.

“Shifts in the monetary policy stance of the BSP will be primarily signaled through changes in its policy rates in order to achieve its inflation targets. The liquidity impact of any RRR reduction will be neutralized through offsetting open-market operations and transactions with the national government,” Espenilla said.

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