Philippine Central Bank Cuts Reserve Ratio for Second Time

(Bloomberg) -- The Philippine central bank cut the ratio of funds that lenders must hold as reserves, in line with a strategy outlined by Governor Nestor Espenilla to reform financial markets.

Philippine Central Bank Cuts Reserve Ratio for Second Time

The reserve requirement ratio was lowered by 1 percentage point to 18 percent, effective from June 1, Bangko Sentral ng Pilipinas said in a statement. The move, the second reduction since March, doesn’t signal a change in the monetary policy stance, it said.

Espenilla flagged that more cuts are on the way, saying in an interview at his office on Thursday that “we’re going to do it in small but multiple increments.”

The reserve ratio is one of the highest in Asia, and the central bank is gradually reducing it to lower its reliance on the instrument for managing liquidity in the financial system.

The risk is that releasing more funds into the system could further boost inflation, which is already at a five-year high.

Click to read Monetary Board Member Felipe Medalla saying in February the goal is to bring the ratio to below 10 percent by 2023

The governor made lowering the ratio one of his key objectives when he took office in July, and has said the era of using the ratio as a policy tool is over. Officials have also said they can use other tools including the weekly auction of term deposit to mop up liquidity if needed.

“It’s a continuing process,” Espenilla said. “If we want to go down to the level of our neighbors, that means it’s multiple small steps that get us there. We started very far.”

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