Bangko Sentral ng Pilipinas (BSP) Governor Nestor Espenilla Jr. wants to cut the reserve requirement ratio of banks by 50 percent, but the central bank is wary of the timing to ensure that the financial system will be able to absorb a surge in liquidity.
"The reserve requirement is something that I'd like to see—personally see—go down to single-digit level, but there is a game plan for it," he told reporters on the sidelines of the Philippine Business Conference and Expo in Manila City.
During a policy meeting on September 21, the BSP Monetary Board kept key policy rates unchanged, including the reserve requirement ratio at 20 percent—among the highest in Asia.
The central bank is really concerned about the timing because of its impact on liquidity, or the amount of money circulating in the financial system, Espenilla stressed.
"The art and science of central banking is to match the supply of liquidity with the demand for liquidity," he said.
"How do you exit from high reserve requirement? There are several things that we are watching. For example, liquidity can be reduced by, let's say, more outflows from the economy ... That's a good time to inject liquidity by lowering the reserves," he said.
The reserve requirement could also be lowered as debt instruments increase and more securities are being issued.
"We want to see the development of more debt instruments and more government securities in the market. When that happens, that will also allow a venue for absorbing the liquidity that we will release when we lower the reserve requirement in stages," Espenilla noted.
"In stages, not in one giant deduction overnight, but progressively. All of this is timed. So we are carefully timing all of this. Not in months, but within a horizon," he added.
The BSP introduced its term deposit facility to manage liquidity starting in June 2016.
Banks and trust entities make a bid for the interest rates which the BSP will pay for them to park their excess funds, but the central has the prerogative to reject bids that do not conform to its policy targets.
Central bank data showed the seven-day, P40-billion offer attracted bids totaling P43.893 billion on Wednesday, at a weighted average accepted yield of 3.3402 percent, and a bid coverage ratio of 1.0973.
The 28-day, P180-billion tenor registered bids amounting to P87.562 billion, at a weighted average accepted yield of 3.4927 percent, and a bid coverage ratio of 0.8756.
The 30-minute auction is held Wednesdays at 9:20 a.m., with a minimum placement of P10 million. — VDS, GMA News