BSP seen lowering reserve requirement in 6-7 months

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) is likely to reduce the banks’ reserve requirement within the next couple of months when the close to P1 trillion worth of funds parked at the central bank’s overnight deposit facility (ODF) is cut by half.

BSP Deputy Governor Diwa Guinigundo said monetary authorities would consider reducing the reserve requirement ratio currently pegged at 20 percent once half of the funds parked at the ODF (formerly the special deposit account facility) or P500 billion are migrated to the term deposit facility (TDF).

“We don’t want to find ourselves in a situation where we are mopping up liquidity and migrating from ODF to TDF and on the other hand you are releasing liquidity through the reduction in the reserve requirement,” Guinigundo said.

Reserve ratios are the percentage of bank deposits and deposit substitute liabilities that banks maintain or deposited with the central bank. It is currently pegged at 20 percent, the highest in the region.

Adjusting policy settings such as the reserve requirement ratio of banks also reduces the intermediation costs while also controlling liquidity.

“I think we have to look at all the numbers and developments in the market before they are able to consider adjusting the reserve requirement ratio,” Guinigundo said.

He explained a percentage point cut in reserve requirement ratio could release between P60 and P70 billion to the financial system.

Guinigundo said, monetary authorities could start considering slashing the reserve requirement ratio once the ODF volume is down by P500 billion.

“We may start to consider cutting the reserve requirement of banks. The process could take six to seven months to complete,” he said.

Starting next month, the BSP is set to offer P70 billion worth of term deposits through the TDF from the current volume of P50 billion. The central bank would auction P10 billion worth of seven-day term deposits and P60 billion worth of 28-day term deposits.

The BSP has raised the volume of the TDF thrice since the interest rate corridor (IRC) system was introduced last June 3. The volume of the weekly auction was originally pegged at P30 billion last June but was raised to P50 billion for the month of July.

The BSP could adjust the volume as it makes announcements two week prior to the scheduled auction and could also conduct another auction every Friday depending on the liquidity in the system.

Term deposits are common tools used by central banks for liquidity management. It allows central banks to withdraw the bulk of excess liquidity from the financial system.

Latest data from the central bank showed liquidity in the financial system expanded 13.5 percent to P8.66 trillion in May from P7.63 trillion in May last year, while bank lending rose 17.7 percent to P5.62 trillion from P4.52 trillion.