BSP chief doused inflation uptick fears after RRR cut

Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr. dubbed as “unfounded” the fears of some analysts of loser monetary policy that can fuel inflation after the recent cut in banks’ reserve requirement ratio (RRR), which monetary officials said is simply an operational adjustment. (Photo: Cheng Ilagan/Philippine Canadian Inquirer)

MANILA — Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr. dubbed as “unfounded” the fears of some analysts of loser monetary policy that can fuel inflation after the recent cut in banks’ reserve requirement ratio (RRR), which monetary officials said is simply an operational adjustment.

In a message to reporters Sunday, the central bank chief, who also announced being declared as free of tongue cancer by his doctors and is now in a pilgrimage at the Holy Land, said he continues to monitor domestic financial developments, especially after the RRR adjustment a few weeks back.

He said the one percentage cut in “the ultra-high” RRR to 20 percent has a neutral effect since the expected PHP90 billion to be released in the economy as a result of the RRR cut is expected to be absorbed by the central bank’s Term Deposit Facility (TDF).

Before the announcement of the RRR change, monetary officials hiked the offering for the seven-day TDF from PHP40 billion to PHP50 billion and the 14-day tenor from PHP20 billion to PHP40 billion.

The expected hike in tenders to the TDF facilities due to possible increase in any excess liquidity as a result of the operational adjustment announced by the BSP is the reason why the RRR cut is not considered as an easing monetary policy stance, Espenilla said.

He pointed out that “if BSP wants to change the monetary policy stance, BSP will signal that overtly, by changing the policy rate (the overnight RRP [reverse repurchase] rate).”

He said the change in policy stance can also be done “more subtly without necessarily changing the RRP rate (but) by allowing the market-determined TDF rates to rise (or fall) by altering auction volumes.”

He explained that TDF, which is part of the Interest Rate Corridor (IRC) and was implemented since June 2016, “has given BSP the fine maneuvering room to conduct monetary policy and gradually bring down RRR.”

He, however, clarified that “the speed and timing of the RRR phase down is largely a function of the liquidity absorbing ability of OMO (open market operations).

He also noted that “to the extent that speculators use RRR reduction as pretext for peso depreciation, BSP sells foreign exchange from its reserves to manage excessive peso volatility” and this, he said, “has the effect of draining peso liquidity from the system which causes a self-correction,”

“The bottomline, 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,” he added.

Espenilla said the RRR cut “is really, in a sense, part of a grand normalisation process. Alongside capital market reforms and fx liberalisation.”

“Implementing these reforms is both complex and exciting. It is a very absorbing endeavour for me,” he said.