The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, announced Thursday the reduction in the reserve requirement ratio of thrift banks by 200 basis points to release more liquidity into the financial system.
It also announced a total reduction of 100 basis points in the RRR of rural and cooperative banks.
Bangko Sentral ng Pilipinas Governor Benjamin Diokno disclosed the RRR adjustments a week after the board announced the adjustment of the RRR of universal and commercial banks by 200 basis points to 16 percent from 18 percent.
“This morning, the Monetary Board decided to cut the RRR for thrift, savings and cooperative banks. For thrift banks, the RRR was cut by 200 bps, from 8 percent to 6 percent,” he said.
Diokno said an initial 100-bps cut would take effect on May 31. It will be followed a reduction of 50 bps on June 28 and another 50 bps on July 26.
“For rural and cooperative banks, the RRR would be cut by 100 bps, from 5 to 4 percent, effective May 31, 2019. The BSP will issue the necessary circular shortly,” Diokno said.
Reserve requirement, also called cash reserve ratio, is a central bank regulation that sets the minimum fraction of customer deposits and notes that each bank must hold as reserves.
Michael Ricafort, an economist of Rizal Commercial Banking Corp., said every 1-percent cut in RRR would mean additional peso liquidity into the financial system of P9.3 billion for thrift banks, and P1.8 billion for rural and cooperative banks.
The BSP cut the RRR of universal and commercial banks by a total of 2-percentage-points, or equivalent to about P190 billion in additional peso liquidity into the financial system (about P95 billion effective May 31, 2019; about P47 billion effective June 28, 2019; and about P47 billion effective July 26, 2019).
Ricafort said the cuts would be “positive for both the Philippine economy and financial markets, in terms of greater economic activities/faster GDP growth.”
ING Bank Manila senior economist Nicholas Mapa said the BSP might have learned from the previous RRR reductions in 2018 when “clandestine” non-policy meeting RRR cuts “caught market off guard…”
“Learning from the previous episode of RRR cuts in 2018, the BSP opted to telegraph the series of ‘measured reductions’ bringing the 2019 edition of redux into the third quarter of the year…,” Mapa said in a report.
“This year, BSP opted to wait for inflation to be clearly on the downtrend before pulling the trigger. Meanwhile, Diokno decided to lay his cards on the table, telegraphing a series of measured adjustments [100 then two 50 bps cuts] in order to minimize both the possible impact on inflation and the currency,” he said.
Mapa said that as a result, there was a “positive market reception” while the effect on the peso has been contained as the currency sit in the middle of the regional pack in terms of performance post easing.
He said inflation was expected to remain behaved both this year and next as supply conditions remained stable even in the face of rising crude oil prices.
Inflation eased to a 16-month low of 3 percent in April 2019 on more stable prices of food and other commodities. This brought inflation in the first four months to an average of 3.6 percent, well within the target range.