February 1, 2018 / 4:32 AM / 19 days ago

UPDATE 1-Philippine c.bank: Coming reserve ratio cuts won't be policy changes

* C.bank says RRR cut part of financial market reforms

* Impact of higher taxes on prices transitory - governor

* C.bank says peso will not suffer a meltdown (Adds comments, background)

By Karen Lema

MANILA, Feb 1 (Reuters) - Plans by the Philippine central bank to cut required reserves for banks should be seen as a move to reform financial markets rather than a change in monetary policy, its governor said on Thursday.

The Bangko Sentral ng Pilipinas has flagged plans to eventually reduce its 20 percent reserve requirement ratio, one of the highest in the region, to a single digit as it cuts reliance on this tool to manage liquidity.

The central bank has not indicated a starting date for the cuts - which it says will be “calculated” and gradual.

“Forthcoming reductions in RRR should not be mistaken as a change in monetary policy stance. Rather, it should be viewed as part of ambitious financial market reforms that BSP is currently implementing,” Governor Nestor Espenilla said in a text message.

“Shifts in the monetary policy stance of the BSP will be primarily signaled through changes in its policy rates in order to achieve its inflation targets,” Espenilla said.

With the shift to an interest rate corridor (IRC) system in June 2016, the central bank could now reduce its reliance on RRR to manage liquidity, he said, adding the liquidity impact of any RRR cut could be offset through open market operations.

“Continued heavy reliance on RRR has become highly burdensome and distorts the financial system,” Espenilla said.

RATE HIKES AHEAD?

The policy stance of the central bank, whose next rate-setting meeting is Feb. 8, has been unchanged since a 25 basis point rate hike in September 2014. It set the key policy rate at 3.0 percent when moving to an IRC framework.

The prospect of a weaker peso and higher inflation, due to higher taxes plus rising oil and food prices, could persuade the central bank to hike rates in 2018 for the first time in more than three years, economists say.

Annual inflation could hit the upper-end of the central bank’s 2-4 percent target in January, due to higher oil and food prices, the central bank has said.

The central bank expects the impact of a new tax law on consumer prices to be “transitory” but would assess its effects on inflation expectations, Espenilla said.

Espenilla also said the peso, Asia’s worst performing currency this year, “is not expected to melt down” because the country’s economic fundamentals remain sound.

“We are very far from any foreign exchange crisis given our large GIR (gross international reserves) buffer and secondary buffers,” Espenilla said. (Reporting by Karen Lema; Editing by Richard Borsuk)

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