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Medalla mentions the necessity to reduce RRR.

Felipe Medalla, governor of the Bangko Sentral ng Pilipinas (BSP), stated that the necessity to lower the reserve requirement for banks is intended to address potential rate tightening impacts once the period of the relief measure that was provided to banks expires.

He is referring to the policy put in place during the epidemic that permitted banks to lend to SMEs as a way to comply with reserve requirements; this measure will expire at the end of June this year.

During an interview with Bloomberg TV on Friday, Medalla stated that the central bank could control domestic liquidity through its different facilities, such as the term deposit facility (TDF) and the 28-day BSP bill.

These facilities are a part of the central bank’s tools to control domestic liquidity by removing excess liquidity from the market. This is done, among other things, to handle potential problems associated with foreign exchange.

However, as Medalla pointed out, “If we allow that (relief measure) to expire, that means tightening, reduction of the money supply.”

To achieve more or less neutral effects on the expansion of the money supply, he continued, “We plan to match that with a reduction in reserves.”

The reserve requirement ratio (RRR) for banks was last modified in 2022 when it was lowered to 12 percent for universal and commercial banks (U/KBs) by as much as 200 basis points.

This was done to give banks the liquidity they needed to lend, which the domestic economy needed to maintain a healthy economy despite the pandemic.

Medalla claimed that after being permitted to issue its debt papers, including the 28-day securities and through the TDF, the central bank’s ability to control domestic liquidity was improved.

And because of this, he continued, “We’re confident that we can control the money supply regardless of what happens.”

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