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BSP allays fears RRR cuts will stoke inflation.

BANGKO Sentral ng Pilipinas (BSP) Governor Nestor A.Espenilla Jr. said they are 'covering all bases' in deciding which policies to implement, including the controversial cuts in the banks' reserve requirement ratio (RRR).

Espenilla gave the assurance that the BSP has enough tools in its monetary policy tool kit to ensure that the fresh liquidity released from the BSP's vaults and into the local cash stream will not find its way toward inflationary avenues.

'The BSP has a diverse tool kit. People worry about the liquidity from the reserve requirement, we say: don't worry, we have other tools,' Espenilla said. 'Even if banks have liquidity, that does not mean you can just give it to any kind of borrower and then create problems for the economy,' he added.

Toward the end of May this year, markets showed mixed reaction to the Monetary Board's decision to bring down by another percentage point the deposit requirement of banks-or the portion of depositors' balances that banks are asked to keep idle in the BSP's vaults as reserves.

This RRR cut is the second slash since Espenilla took office in July 2017. Each cut is estimated to release P90 billion worth of liquidity into the local cash stream.

The BSP's seeming eagerness to consistently bring down the banks' idle funds has been lauded by the big guns in the lending sector, saying the RRR cut will enable borrowers to have 'access to more sources of funds and more efficient cost of borrowing that is expected to propel more economic activity in the country.'

However, a number of local and international economists raised the concern that, as

textbook economics show, more money pumped in the cash stream bears risk of stoking inflationary pressures upward.

Most recently, international financial institution Deutsche Bank said in its research note that the RRR cut sends mixed signals to investors on whether the Central Bank is willing to go all out in its tightening cycle to control the rising trend of inflation.

Amid these concerns, Espenilla defended the BSP's decision and cited the BSP's auction facility as one that will effectively manage liquidity from banks.

On top of that, the BSP chief also said the twin liquidity guidelines-the Net Stable Funding Ratio (NSFR) and Liquidity Coverage Ratio (LCR) will ensure liquidity conditions are in check among banks.

The NSFR, as approved for implementation by the BSP a week ago, is a measure of the ability of a bank to fund its liquidity needs over one year. The LCR, on the other hand, covers a shorter period of over 30 days.

Both ratios require banks to hold sufficient liquidity assets for certain times of scenarios.

'There are safeguards in place. There are parameters. That is why we are comfortable with the way policy is evolving because we are covering all bases,' Espenilla said.

Since the BSP's shift to the auction-based monetary operations under the interest-rate corridor framework in 2016, Espenilla- who was then deputy governor of the supervision and examination sector-was already vocal on the need to bring down the banks' RRR.

Even now at 18 percent, the Philippine banking industry's RRR is still one of the highest in the region.

Espenilla said the BSP plans to bring the RRR to a single-digit level on a gradual process in the medium term.

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Publication:Business Mirror (Makati City, Philippines)
Date:Jun 12, 2018
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