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Thursday, March 28, 2024

Lower reserve requirement ratio has minimal impact on inflation

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An economist said Monday the “telegraphed and measured” move of the Bangko Sentral ng Pilipinas to reduce the reserve requirement ratio of commercial banks from 18 percent to 16 percent will have a minimal impact on inflation and currency.

ING Bank Manila senior economist Nicholas Mapa said the BSP learned from the previous RRR reductions in 2018 where “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.

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Mapa said that as a result, there was a “positive market reception” while the effect on the peso was contained as the currency sat in the middle of the regional pack in terms of performance post easing.

He said the inflation rate was expected to remain behaved both this year and next as supply conditions remained stable in the face of rising crude oil prices.

Inflation eased to a 16-month low of 3 percent in April from 3.3 percent in March on more stable prices of food and other commodities. This brought inflation in the first four months to an average of 3.6 percent, within the target range of 2 percent to 4 percent.

The policy-making Monetary Board of the Bangko Sentral ng Pilipinas cut the reserve requirement ratio of banks by 200 basis points or 2 percent to 16 percent from 18 percent in a bid to free up additional liquidity to the financial market.

BSP Governor Benjamin Diokno said the reduction would happen in three stages: 100 basis points cut effective May 31; 50 bps cut on June 28; and 50 bps cut on July 26.

“This new policy will apply to universal and commercial banks only. For the other types of banks, the cut in RRR will be considered in the next MB meeting,” Diokno said.

Reserve requirement, also called cash reserve ratio, is a central bank regulation to set a minimum fraction of customer deposits and notes that each commercial bank should hold as reserves.

Mapa earlier said this was the perfect opportunity for the BSP to cut both the policy rate and RRR as inflation was returning within the target range and GDP growth dropping to 5.6 percent in the first quarter. 

“The gradual reduction in RRR will definitely help alleviate the current tight liquidity conditions and complements its recent policy rate cut,” Mapa said.

He said “we will be monitoring whether current levels of funds parked at the BSP remain steady or increase in order to gauge whether banks have indeed channeled the additional liquidity to productive enterprises outside the BSP.”

The Monetary board on May 9 reduced the overnight borrowing rate by 25 basis points to 4.5 percent, the first time in more than six years, taking into consideration the downward trajectory of the inflation rate.

Diokno said the Monetary Board’s decision was based on its assessment that the inflation outlook continued to be manageable.

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