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Enough RRR cuts this year––Espenilla

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. says the 200 basis point cut in banks' reserve requirement ratio (RRR) is enough for the year.

Espenilla made the pronouncement despite the forecasts of some analysts that said otherwise.

The BSP’s policy-making Monetary Board (MB) reduced commercial and universal banks’ reserve requirement by 100 basis points each in February and May as part of the central bank’s bid towards a more market-based implementation of monetary policy and continued financial market reforms.

Espenilla is committed to bring big banks’ reserve requirements to single digit levels before his six-year term ends in 2023.

In a message to journalists Thursday, the central bank chief said the liquidity impact of their recent RRR cuts “has been fully neutralized through OMO (open market operations), which includes the overnight reverse repurchase (RRR) facility.

He said reduction in RRR “can resume next year just as inflation returns to target based on our forecast.”

“The goal of achieving single digit RRR by the end of my term is therefore quite attainable without sacrificing effective monetary control. Cutting RRR by 200 bps this year already sends a credible and concrete signal to the financial system of BSP(‘s) commitment to structural reforms so the industry can be guided accordingly in developing their long term strategic plans,” he added.

Inflation continues to rise and averaged at 4.3 percent in the first half of 2018, higher than the government’s 2 to 4 percent target for this and next year.

It registered a multiyear high of 5.2 percent last June from the previous month’s 4.6 percent after the jump of the heavily-weighted food and non-alcoholic beverages index and strong rise of the alcoholic beverages and tobacco index partly due to the tax reform law.

On Wednesday, Luis E. Breuer, Mission head of the IMF team that visited the country from July 11-25, 2018 for the Article IV Consultation, said the Philippines continues to have high RRR level and noted that “reducing them is a good thing.”

He explained that maintaining high RRR levels in the past years is necessary when the country registered balance of payment (BOP) surpluses “that had monetary effect and given that the BSP’s legal framework limits how it can control inflation.”

“There is no question to us that reducing RR is a good thing. The question is when to do it and by how much,” he said, but stressed that this decision lies on the hands of monetary authorities.

The IMF official said the RRR cuts so far this year have not resulted in any significant monetary impact “because the BSP offset these actions with other measures including increasing sterilization and absorption of liquidity using other tools. But we also noted that this has led to some communication challenges on the stance of monetary policy,” he said.

Breuer said the IMF supports the “BSP’s intention to take stock of what has been done already and pause perhaps on further reductions on the reserve requirement until inflation is clearly on a downward path and inflationary expectations are better anchored.”

“Communications as they relate to inflation expectations are very important because perceptions have an economic impact,” he added.