Philippine Central Bank Says There’s Room to Cut Reserve Ratio

Low inflation in the Philippines gives the central bank room to cut reserve requirement ratios, even though there’s already sufficient money supply in the financial system, according to the Bangko Sentral ng Pilipinas.

The benign inflation environment gives it “some room for further reductions in RRRs if necessary, even as recent indicators of financial market activity continue to indicate that market liquidity remains adequate,” the central bank said Wednesday in an email to Bloomberg. The decision to cut depends on “domestic liquidity and credit dynamics in the coming months.”

Bangko Sentral has been doing much of the heavy lifting to boost an economy in recession, including cutting its benchmark interest rate by 175 basis points this year. It also has cut banks’ reserve requirement ratio by 200 basis points to 12%, part of a series of liquidity-enhancing steps that include looser reserve rules and bond buying. Policy makers have authority to lower the RRR by another 200 basis points this year.

Financial system liquidity stood at 1.7 trillion pesos ($35 billion) as of Oct. 19, exceeding a peak last seen in 2016, the central bank said. But lenders remain risk-averse due to “asset quality concerns, which suggests that other policy tools may be needed in conjunction with liquidity support, such as fiscal support for distressed corporates,” the central bank said.

Policy makers will meet Nov. 19 to review monetary settings.

While “further monetary policy accommodation will remain an option,” the central bank said, “decisions will remain evidence-based, guided primarily by the outlook for inflation that is supportive of economic growth.” Consumer prices rose 2.5% in October, within the bank’s 2%-4% target band.

Other points from the email:

  • Loans extended to both small business and large enterprises, booked under banks’ looser RRR compliance, rose
  • As of Oct. 22, loans to small businesses totaled 127.3 billion pesos, while those extended to big firms totaled 27.9 billion pesos
  • The monetary authority said it sees Philippine businesses “increasingly” tapping bond and equity markets. “This is an indication that the liquidity-enhancing measures implemented by the BSP have helped alleviate corporates’ funding constraints,” the central bank said

©2020 Bloomberg L.P.

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