New BSP charter gives space for RRR cuts

MANILA, Philippines — The lead economist of Ayala-led Bank of the Philippine Islands (BPI) said the amendments to the charter of the Bangko Sentral ng Pilipinas (BSP) give monetary authorities more room to slash the level of deposits banks are required to keep with the central bank.

BPI lead economist Jun Neri said cuts of more than two percentage points in the reserve requirement ratio (RRR) this year and even more are possible following the signing of the charter amendments.

President Duterte has signed into law Republic Act 11211, which amended RA 7653 or the New Central Bank Act.

The economist sees the BSP’s Monetary Board slashing the RRR during its rate-setting meeting on June 20.

“When prices and monetary conditions allow it, RRR reduction can be carried out more aggressively,” Neri said.

According to Neri, the BSP may slash the RRR by at least two percentage points or as much as four percent this year.

He said the central bank would prioritize structural reform measures that have a net-easing impact on liquidity once it is clear that the inflation target is within reach.

Other than a host of other medium and long term benefits, the RRR cuts would likely help temper the crowding-out effect of public sector deficit spending expected to continue this year.

“In particular, the liquidity expansion expected to result from the RRR cuts is anticipated to further ease the tightening of liquidity conditions in the domestic funds market seen since September,” he said earlier.

The BSP has reduced the RRR twice last year to 18 percent from 20 percent releasing around P190 billion in additional liquidity into the financial system.

The first reduction that took effect on March 2 last year injected P90 billion worth of fresh funds into the system followed by another 100 basis point cut on June 1, 2018 that poured around P100 billion in additional liquidity into the economy.

The new BSP Charter authorizes the increase in its capitalization to P200 billion from P50 billion. The increase will be sourced from dividends declared by the BSP in favor of the national government.

Under the new charter, BSP is also exempt from taxes on income derived from governmental functions, placing the central bank in a stronger position to pursue its price and financial stability mandate amidst a growing economy and the increasing sophistication of the financial system.

“The amendments to the BSP Charter are both timely and attuned to a fast-evolving market landscape. We also recognize the efforts of central bankers who began spade work on this legislative initiative some 20 years ago. Under our new Charter, we will continue to build on the central bank’s rich institutional experience under BSP’s Continuity Plus-Plus program,” BSP Governor Nestor Espenilla Jr. said.

The new charter embodies a package of reforms to further align its operations with global best practices, improve the BSP’s corporate viability, and enhance its capacity for crafting proactive policies amid rising interlinkages in the financial markets and the broader economy.

In line with current international trends, the law removes money supply and credit levels as basis for determining monetary policy. The focus on these indicators has declined among central banks over the years, as fostering price stability now considers a broader set of indicators.

It also restores the central bank’s authority to issue debt papers as part of its regular operation. This gives the BSP greater flexibility in determining the timing and size of its monetary operations.