RRR cut

PHILIPPINES - In Brief 16 Feb 2018 by Romeo Bernardo

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On the eve of the lunar new year, the Bangko Sentral ng Pilipinas cut banks’ reserve requirement ratio from 20% to 19%, releasing about P90 billion into the financial system. The move was a surprising one coming on the heels of a higher than expected January inflation rate and at a time when market players are fretting about inflation risk from both domestic and external sources, including an exchange rate that has depreciated rather sharply in the last few weeks.Three points are clear in the BSP’s statement explaining the move. It considers this (1) a mere "operational adjustment," meant to (2) "gradually lessen its reliance on reserve requirements for managing liquidity in the financial system", and (3) shift to the use of the interest rate corridor framework "to mitigate the potential liquidity impact... via offsetting auction-based monetary operations." This week, the BSP started raising the volumes offered under its term deposit facility, offering a new 14-day term deposit facility with a P20- billion initial offering that will be raised to P40 billion next week. Together with the resumption of the 28-day deposit, these adjustments could potentially mop up more liquidity than what will be released under the reserve requirement cut.Despite the timing surprise, we think this clever move signals not only the BSP’s comfort with using more market-friendly policy tools to manage liquidity, even under the current more challenging inflation environment, but is a demonstration of a swift-footed Monetary Board, alert to windows of opportunity for removing a long-recognized distortive tax on financial intermediation. The cost of mopping up the released funds should not be to...