IMF backs gradual cut in bank reserves

MANILA, Philippines — The International Monetary Fund (IMF) is strongly supporting the gradual lowering of the level of deposits banks are required to maintain with the central bank to single digit, in tandem with capital market reforms.

IMF resident representative Yongzheng Yang said in a press conference the multilateral agency agrees with the Bangko Sentral ng Pilipinas (BSP) that the reserve requirement ratio (RRR) currently pegged at 20 percent should be reduced.

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“We agreed with the BSP that these reserves should be lowered but there is no rush to do that,” Yang said.

RRR is the percentage of bank deposits and deposit substitute liabilities that banks maintain or deposit with the central bank. The Philippines has the highest ratio in the region.

Adjusting policy settings such as the RRR also reduces the intermediation costs while also controlling liquidity.

BSP Governor Nestor Espenilla Jr. earlier said he prefers the RRR reduced to  single-digit level.

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“The RRR is something that I would like to personally see to single-digit level. But there is a game plan for it. So our game plan is to do it in such a way to avoid the situation – that we are unleashing too much liquidity that the economy is unable to absorb,” Espenilla said during the recent Philippine Business Conference and Expo.

Yang said the reduction of the RRR is a data-driven exercise.

“You have to look at the liquidity in the market. We say the current monetary policy stance is fine, you don’t move that,” he added.

He said tweaking the policy stance and the RRR would release more liquidity in the financial system.

Aside from liquidity, Yang explained the BSP would also have to watch inflation that is seen staying within the central bank’s two to four percent target.

“You have to know whether you need to inject or absorb liquidity. If there is need to inject liquidity, you have to lower the RRR. This will take time because the RRR right now at 20 percent is really high. It will take a while to get to single digit,” he said.

The BSP’s Monetary Board last tweaked the RRR in May 2014, raising the level to 20 percent from 19 percent to mop up more cash from the economy amid the elevated growth rates in liquidity and lending.

A one percentage-point reduction or increase releases or siphons off about P90 billion worth of liquidity into the financial system.

During the rate-setting meeting last Nov. 9, the Monetary Board kept interest rates as well as the RRR untouched, but raised the inflation forecast for 2018 to 3.4 percent instead of 3.2 percent primarily due to rising fuel prices as well as the weak peso.