The central bank will temporarily pause its policy of reducing the amount of cash that banks must hold in reserve to focus on fighting inflation, which currently stands at its highest level in at least five years.
In a statement, Bangko Sentral ng Pilipinas Governor Nestor Espenilla Jr. said bank regulators “have done enough” after reducing banks’ statutory reserve requirements by two percentage points this year.
“This initiative can resume next year just as inflation returns to target based on our forecast,” he said through a note sent to reporters via instant messaging on Thursday.
Espenilla wants to reduce banks’ reserve requirement ratios to single digit levels to allow the local economy to make better use of the funds that are otherwise kept unproductive in bank vaults. But his initial moves — two one-percentage point cuts, with the most recent cut coming a week after the central bank raised interest rates — have caused confusion among banks who questioned the timing of the reserve reductions amid record high inflation.
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The BSP chief explained that the reductions were “in line with the strategy to implement this important financial sector reform over the medium term in a gradual and phased manner” and that the additional liquidity that the reserve cuts released into the financial system were mopped up by the central bank’s open market operations.
An estimated P180 billion in cash was released into the local economy by the twin reserve cuts which were, in turn, recaptured by the BSP through its weekly term deposit facility auctions, where it paid banks interest in exchange for depositing idle funds back with the regulator.
