BSP orders 3-stage bank reserve cut

The central bank on Thursday moved to release more liquidity into the Philippine financial system amid an environment of declining inflation and lower economic growth in the first quarter of 2019.

In a message to the press, Bangko Sentral ng Pilipinas Governor Benjamin Diokno said the amount of cash banks were required to immobilize in their vaults would be reduced by 200 basis points in three stages over the next three months.

“The Monetary Board decided to reduce the reserve requirement ratio from 18 percent to 16 percent,” he said via SMS.

Once complete, the reduction in bank reserves will release as much as P200 billion into the domestic economy—funds that financial institutions will lend out to public and private borrowers which, in turn, will be used for productive activities.

The first adjustment will be a 100-basis point reduction effective May 31, to be followed by a 50-basis point cut on June 28, and a final 50-basis point reduction on July 26, 2019.

“This new policy will apply to universal and commercial banks only,” Diokno said, adding that any adjustment in the reserve requirements of smaller financial institutions “will be considered in the next Monetary Board meeting.”

The move follows last week’s 25-basis point reduction in the central bank’s key overnight rate, which officials said was made possible by the sixth consecutive month of decline in the country’s inflation rate.

Last year, the BSP raised interest rates by a combined 175 basis points to combat spiraling inflation—a problem that had since been contained.

“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 more so with GDP dropping to 5.6 percent,” ING Bank Manila senior economist Nicholas Mapa said.

“After slamming hard on the proverbial brakes in the third quarter of 2018, the central bank believed it was time to give the economy a much needed breather especially with the inflation objective well in hand,” he added.

Meanwhile, with liquidity conditions tight—as evidenced by seven months of single-digit money supply growth and multiyear high time deposit rates—BSP looked to finally address the lack of funds circulating in the system, the ING economist said.

Analysts expect the BSP to remain data dependent and forward looking in its bid to balance its goals of price stability with achieving 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,” Mapa said. “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.”

Growth will likely fall within the government’s 6-7 percent target while inflation remains benign, all the while continuing BSP’s reform agenda, he said.