THE New Central Bank Act will give the Bangko Sentral ng Pilipinas (BSP) more leeway to cut its reserve requirement rates (RRR) further this year, a private economist said.

Bank of the Philippine Islands (BPI) economist Emilio Neri Jr. gave this assessment in his recent research note on the Philippine economic dynamics.

“We note that the new BSP charter gives the Central Bank the opportunity to reduce the RRR by more than 2 percent this year,” Neri said.

Earlier in February, President Duterte signed into law Republic Act 11211, or “An Act Amending Republic Act 7653, otherwise Known as the ‘New Central Bank Act,’ and for Other Purposes.”

Among the new provisions in the amended legislation is the restoration of the Central Bank’s authority to issue debt papers as part of its regular operation.

“The RRR has been kept high for two main reasons. First, the BSP did not have the power to issue its own debt which would have provided additional flexibility in the management of liquidity,” Neri said, noting that other central banks in the region have this ability, thus enabling them to keep RRR at a low level.

“Second, using market-based policy tools such as OMO [open market operations] and TDF [term deposit facility] involves costs that require more capital. In contrast, the RRR is a cost-free policy tool. With more capital and with additional policy tools in its arsenal, we think the BSP can reduce the RRR even further,” Neri said.

Markets have been forecasting a cut in the BSP’s RRR, especially after new Governor Benjamin Diokno made pronouncements that he will continue the late governor’s plans to reduce the banks’ RRR to single-digit levels.

In May 2018, late BSP Governor Nestor Espenilla Jr. decided to bring down the deposit requirement—or the portion of depositors’ balances that banks are asked to keep idle in the BSP’s vaults as reserves—effectively putting the Philippine banking industry’s RRR to 18 percent.

This RRR cut is the second slash since Espenilla took office in July 2017.

The BSP also made clear that the reductions, past or future, in banks’ RRR are “calibrated” and “are not intended to signal any change in the prevailing monetary-policy stance” all while assuring that the BSP has the scope to offset their potential liquidity impact via an expansion in auction-based monetary operations.

Since the BSP’s shift to the auction-based monetary operations under the interest rate corridor (IRC) framework in 2016, Espenilla —who was then deputy governor of the supervision and examination sector—was vocal on the need to bring down the banks’ RRR.

Even at 18 percent, the Philippine banking industry’s RRR is still one of the highest in the region.