Diokno rules out abrupt deposit reserve cuts

Diokno said the BSP is evaluating and assessing what the banks are or have been doing with the unleashed liquidity.

The Bangko Sentral ng Pilipinas (BSP) on Wednesday signaled continued cuts in the banks’ deposit reserves next year although the phased reduction should prove slower than this year.

This was learned from BSP Governor Benjamin Diokno who told financial reporters of a slower easing in the banks’ reserve requirement ratio (RRR) as part of its forward guidance for the market.

“The RRR will be cut into single digit by the end of my term. We have already reduced it by 400 basis points. I still have around 14 quarters…that’s 500 basis points in 14 quarters,” Diokno said of the target deposit reserve of only 9 percent by the end of his term in 2023.

“I’m not in a hurry to cut the RR as I have 14 quarters…That’s my forward guidance,” he added.

According to him, the BSP will remain transparent of its planned course of actions to prepare the market, “unlike other central banks who keep it vague.”

Also, Diokno said the BSP is evaluating and assessing what the banks are or have been doing with the unleashed liquidity.

“We evaluate where the banks (deploy the funds). Do they lend it? Because if they will just return it to us, it will be very costly for us. We want them to lend to small scale industries,” he said of bank funds kept in the vaults of the BSP for which it pays the lenders interest.

Diokno likewise said they will resume winding down the key policy rates in 2020, similar to what counterpart central banks have been doing.

“We’re observing what the other central banks are doing. As of now, they are still on an unwinding mode. What will be the implication if they are cutting and then we keep our rates? Hot money will flow inward the Philippines at an abnormal rate. We don’t want that, we don’t want hot money,” Diokno explained of a prospective 50 basis point reduction in the policy rates at some point forward.

“They are taking advantage of the Philippines. Hot money comes in when things are nice and they exit as soon as things are bad. So, we’ll observe what the other countries are doing…But for RR, we’ll take it slow. You can expect that,” he added.

Previously, the BSP reduced its key policy and deposit reserves by a total of 75 and 400 basis points, respectively, bringing the rates to only 4 percent and 14 percent on the same this year.