Philippine central bank cutting reserve requirement after last week’s rate cut

MANILA, NNA – The Philippine central bank said Thursday it will cut the amount of cash reserves the largest lenders must hold in three stages to help boost the money available for economic activity amid slowing growth.

Bangko Sentral ng Pilipinas (BSP), which cut its key interest rate last week on signs that inflation is under control, will lower the reserve requirement ratio (RRR) for commercial banks by a total of two percentage points to 16 percent over the next couple of months, down from 18 percent, the highest in Asia.

Key points:

-- The first 100 basis-point reduction in RRR will take effect on May 31, with another 50-point cut on June 28 and the last 50-point trim on July 26. Last week,

BSP Governor Benjamin Diokno said the monetary board would discuss the possibility of cutting the reserve requirement in the May 13 week.

-- Felipe Medalla, one of the seven BSP monetary board members, told NNA in a text message Friday that the cut in cash reserves was aimed at allowing banks to lend more. The BSP is also considering reducing the RRR for thrift banks and rural banks, he said.

-- Last week, the central bank cut its key rate by 25 basis points to 4.25 percent on signs inflation is under control after hitting a 10-year high in 2018. The move came hours after the government reported that the Philippine economy grew at the slowest pace in four years in the January-March quarter, as the delay in budget approval dented some program and infrastructure spending and exports lost steam amid the global slowdown.

Takeaway:

-- Economists view the sharp reduction in the RRR as a positive factor for the economy that should support consumption, and also in line with the central bank’s plan to lower it below 10 percent before the current governor’s term ends in 2023.

-- Michael Ricafort, economist at the RCBC bank, said the reduction will infuse a total of about 180 billion pesos ($3.4 billion) of additional liquidity into the local financial system. “The latest RRR cut should be generally positive for the local economy and financial markets in terms of greater amount of funds/loans to be made available by banks to businesses and consumers/households, which may spur greater economic activities and faster GDP growth,” he stated.

-- “Around 90% of loans domestically are made through universal and commercial banks, which means that the RRR cuts will still be highly effective in boosting liquidity and improving monetary transmission,” HSBC economist Noelan Arbis said. Combined with the BSP’s rate cut last week, the RRR cut should help boost domestic consumption and private investment in the quarters ahead, he said.

-- Arbis said they expect the BSP to further cut both its reserve ratio by another 100 basis points and the key lending rate by 25 basis points in the October-December period. From now on, excess liquidity will be managed by increasing the size of non-monetary liabilities (overnight reverse repo and term deposit auctions), he explained.

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