The Philippine Central Bank sells dollars from its pile to curb excessive peso volatility against speculators using a cut in banks’ reserve ratios “as pretext,” Governor Nestor A. Espenilla Jr. said.
The peso, the worst performing among emerging markets next to the Argentine currency, fell the most in three weeks on February 19 after the Bangko Sentral ng Pilipinas (BSP) announced a cut in lenders’ reserve requirement ratio (RRR) to 19 percent from 20 percent. While the move effective in March will free up to P90 billion ($1.7 billion) from banks’ vaults, Espenilla said this isn’t monetary easing.
In written remarks from Jerusalem sent in a mobile-phone chat group with reporters on Sunday, Espenilla also revealed he was diagnosed with “very early stage” tongue cancer last November, had surgery and radiation therapy and is now cancer-free.
Espenilla’s comments: “If the BSP wants to change the monetary policy stance, the BSP will signal that overtly, by changing the policy rate [overnight reverse repurchase rate or RRP]. But it can also do that more subtly without necessarily changing the RRP rate, by allowing the market-determined TDF [term-deposit facility] rates to rise [or fall] by altering auction volumes.”
“The establishment of this new IRC [interest-rate corridor] mechanism since 2016 has given BSP the fine maneuvering room to conduct monetary policy and gradually bring down RRR. The speed and timing of the RRR phase-down is largely a function of the liquidity absorbing ability of OMO [open-market operations]. Therefore, analyst fears of ensuing looser monetary policy that can fuel more inflation is really unfounded,” he said.
Espenilla added: “Moreover, to the extent that speculators use RRR reduction as pretext for peso depreciation, BSP sells dollars from its reserves to manage excessive peso volatility. That in itself also has the effect of draining peso liquidity from the system, which causes a self-correction.”
“The bottom line, the BSP has many options to maintain firm monetary control. The key reason it is lowering RRR is to promote a more efficient and level financial system that’s less biased against deposit-taking financial institutions which creates market distortions. This is really in a sense part of a grand normalization process. Alongside capital market reforms and foreign exchange liberalization,” he added.