THE lead economist of the Bank of Philippine Islands, Emilio Neri Jr., is suggesting that the central bank reduce the reserves required against bank deposits to ensure that the peso remains competitive.
Neri said he expects the Monetary Board in its meeting today (Thursday) to keep policy rates unchanged. What the MB should consider, he said, is the reduction of the reserve requirement ratio (RRR) for banks which, at 20 percent currently, is the highest in the region after China cut its RRR to 19.5 percent overnight.
A lower reserve requirement would ease upward pressures on the peso and will ensure that business process outsourcing, exporters, overseas Filipinos and import-competing industries stay price competitive, Neri said.
He said recent monetary easing by the European Central Bank and other central banks in developed and emerging markets, combined with low oil prices, can continue to exert upward pressure on the Philippine peso if the Bangko Sentral ng Pilipinas (BSP) keeps all policy setting steady.
At its December 11 meeting, the Monetary Board kept the rate for the overnight borrowing, or reverse repurchase (RRP) facility, at 4 percent and the rate for overnight lending, or repurchase facility, at 6 percent.
The special deposit account (SDA) rate was maintained at 2.50 percent and the reserve requirement ratio for banks at 21 percent.
“Given strong domestic demand and the specter of a Fed interest rate hike still apparent for 2015, we believe that the appropriate policy move for BSP would [be to]act more in the realm of reserve requirement ratios rather than adjustments to its policy rate and the special deposit account rate,” Neri said.
At separate meetings on March 27 and May 8 last year, the Monetary Board decided to hike the RRR for banks by 2 percentage points to 20 percent on the view that accelerating domestic liquidity could foment the build-up of inflationary pressure.
Neri said the growth in liquidity can be traced to the banning of investment management accounts in the SDA on May 20, 2013.
He pointed out that the fine-tuning of policy ushered in an exodus of funds originally parked in the SDA into the liability side of commercial banks’ balance sheets, pushing domestic liquidity growth to as high as 38 percent in January 2014.
The resulting policy changes were estimated to have siphoned off P120 billion in banks’ funds which now lie fallow in the BSP vaults, he said.
As a result, the economist stressed that the high RRR on peso deposits and the absence of a reserve requirement on FX [foreign exchange]deposits may have encouraged banks to intermediate in US dollars or euro, among others, to improve interest margins, possibly fuelling currency mismatches in the balance sheets of Philippine corporations.