THE Bangko Sentral ng Pilipinas (BSP) is keen on undertaking studies on the impact of the reserve requirement ratio (RRR) in the hope of bringing back lending and borrowing activities that have found their way outside of regulation due to the ratio.
BSP Governor Eli M. Remolona Jr. described as passé the traditional view—common in the 1960s—that the reserve requirement is a way to control money support. Remolona said during a briefing last Wednesday that while the BSP has already cut the RRR “quite a bit” (See: https://businessmirror.com.ph/2023/06/09/banks-rrr-slashed-by-250-bps/), further reduction may be needed to encourage more lending and borrowing activities.
“We traditionally look at reserve requirements as a way to control money supply. That was the thinking in the 1960s. That thinking has gone away. Now reserve requirements are seen as a distortion of financial intermediation. They drive a wedge between deposit and lending rates,” Remolona said. “We’ve lowered our reserve requirements quite a bit. I think there’s room to lower them some more. But we need good research on that, on exactly what the impact of reserve requirements are on financial intermediation,” he added.
‘Grey market’
REMOLONA said there is now a “grey market” where “conglomerates lend to each other” without any big contracts. This is something that BSP wants to bring back into the ambit of the formal banking system.
“I think intermediation for now is a bit burdened by regulation, including reserve requirements, to the point where a lot of lending and borrowing happens outside the perimeter of regulation,” Remolona said.
Apart from this, Remolona also said it was important for the BSP to conduct studies on “measur(ing) the degree to which inflation expectations are anchored” and determine when they start to de-anchor.
An inflation-targeting central bank like the BSP is keen on maintaining inflation expectations anchored on the targets set by the monetary authorities.
With this and the impact of higher temperatures on food, the study found that it is important for non-monetary measures to keep inflation expectations anchored.
“Once expectations become de-anchored, our life becomes much more difficult. We have to be much more hawkish than before, I think, once expectations become de-anchored. So we have to be able to measure that, the tendency for that,” Remolona said.
Policy concerns
THE recent research by the BRAC cited that rising temperatures affected farm production thereby increasing prices. More expensive food, particularly rice, has a significant impact on inflation and must not only be met with monetary measures but non-monetary measures as well.
This becomes particularly significant in light of the recent announcement that El Niño has led to damages of up to P1.75 billion. This left the Marcos administration to reconsider any rate cuts.
“How it would affect monetary policy is through the Secretary of Finance. The Secretary of Finance is one member of a 7-member monetary board. So he has one vote among seven members. So he can vote the way he wants to vote,” Remolona said.
“But we have, thankfully, we have an independent central bank. And the independence is mainly between fiscal policy and monetary policy. We have to coordinate. But we’re not going to be driven by fiscal policy concerns,” he added.
These kinds of studies along with a hundred other researches have been proposed by Remolona to the BSP’s Research Academy (BRAc). This coincides with the Governor’s plan to foster a culture of research within the BSP to further aid in monetary policy-making.
‘Research culture’
REMOLONA said while the United States Federal Reserve is considered to have the best research culture among central banks all over the world, it would be a stretch for the BSP to immediately emulate researches done by the Fed.
Nonetheless, the BSP Governor believes the Philippine central bank could easily emulate the regional efforts such as those undertaken at the Bank of Thailand and Bank of Japan. The European Central Bank (ECB) is another excellent example, he said.
“The ECB has very good research. Our neighbors, Bank of Thailand, does very good research. Japan does very good research. So those are the central banks that have a research culture,” Remolona said.
The key to fostering a research culture in the BSP is for greater data sharing. Remolona noted that the best Central Banks in the region do not have data-sharing agreements.
Abolished agreements
REMOLONA said following their example, the central bank has already abolished all its data-sharing agreements to allow for the free-flow of information that could be used for researches.
“You share your data in good faith. You don’t assume that the guy, the researcher, will misuse the data. You have to trust your colleagues to do the right thing. We have a very strong relationship with the regulatory culture, I think, to the point where we try to over-regulate ourselves, which I think is not good for research,” Remolona said.
Established in January 2021, the BRAc si mandated to lead the development of a comprehensive and integrated research agenda; design and implement research support programs; and conduct research and facilitate publication of research work.
It is also tasked to prepare papers, articles, and notes for BSP top management; facilitate research collaboration within BSP and its partner institutions; conduct research dissemination activities; and ensure BSP has presence in the domestic and global research community.