The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, decided on Thursday to reduce the reserve requirement ratio of universal and commercial banks by 200 basis points within two months to 16 percent from 18 percent to bring more liquidity into the financial market.
“The Monetary Board decided today to reduce the RRR by 200 bps―from 18 percent to 16 percent to be implemented in three stages,” Bangko Sentral ng Pilipinas Governor Benjamin Diokno said.
The RRR cut is expected to release additional liquidity of about P230 billion into the financial system based on the P11.576-trillion deposits held by universal and commercial banks as of end-2018 as reported by Philippine Insurance Deposit Corp.
The Bankers Association of the Philippines said the RRR cut was appropriate as this would help boost the economy.
“The 2% cut in reserve requirements recognizes the BSP’s effectiveness in strengthening the country’s banking system. It is a bold move, coming on the heels of a policy rate cut, but equally appropriate given how our financial system has advanced under the BSP’s stewardship,” said BAP president Cezar Consing.
The BAP expressed optimism that the RRR reduction, together with the easing of policy rates, would sustain the growing economic momentum.
Diokno said the first 100-basis-point cut would be effective on May 31. The BSP will implement the 50-bps cut on June 28 and another 50-bps reduction on July 26.
Diokno announced the RRR cut a week after the board reduced the overnight borrowing rate by 25 bps to 4.5 percent.
“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 that requires commercial banks to hold a minimum fraction of customer deposits and notes as reserves which they cannot lend out.
The reserve requirement ratio in the Philippines at 18 percent is one of the highest in the region.
Nicholas Mapa, a senior economist of ING Bank Manila, said with inflation gliding back to within target and expected to remain benign well into 2020, this was the perfect opportunity for the BSP to cut both the policy rate and reduce RRR as the gross domestic product grew at a four-year low of 5.6 percent in the first quarter.
Inflation eased to a 16-month low of 3 percent in April 2019 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 government target range.
“The gradual reduction in RRR will definitely help alleviate the current tight liquidity conditions and complements its recent policy rate cut,” Mapa said.
“After slamming hard on the proverbial brakes in the third quarter of 2018 by jacking up rates by 175 bps, the central bank believed it was time to give the economy a much-needed breather especially with the inflation objective well in hand,” he said.
Mapa said the BSP would remain data-dependent and forward-looking to safeguard price stability and achieve an environment conducive for economic growth.
“Moving forward, growth prospects appear to point north post-budget passage and all the more with slowing inflation and the recent BSP easing seen to drive both consumption and capital formation. But for now, after priming its “pacemaker” for growth, the BSP’s move for a ‘transfusion’ was welcome as it complements its previous policy rate cut,” he said.
Mapa said GDP growth would likely fall within the government’s target range of 6 percent to 7 percent while inflation would remain benign.
The BSP cut the benchmark policy rate by 25 basis points on May 9, the first time in more than six years, taking into consideration the downward trajectory of inflation rate in the past few months.
Diokno said the Monetary Board’s decision was based on its assessment that the inflation outlook continued to be manageable.
He said latest baseline forecasts indicated that inflation would likely settle within the target range of 2 percent to 4 percent for both 2019 and 2020.