‘Medicines, vitamins’ vs COVID-19: BSP cuts bank reserves to inject P200B into PH economy

The central bank fired off another major weapon in its arsenal on Tuesday (March 24) in an effort to flood the local financial system with cash and, hopefully, buttress the country’s economy that is expected to slow down substantially due to the COVID-19 pandemic.

In a mobile phone message to media, Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said the Monetary Board convened a special meeting on Tuesday and decided to reduce banks’ reserve requirement by 200 basis points effective March 30, 2020.

The move effectively frees up an estimated P200 billion in cash from banks’ vaults, which policy makers hope will be channelled into cheap loans that will encourage more economic activity.

“The reduction is intended to calm the financial markets and encourage banks to continue lending to both the retail and corporate sectors,” Diokno said.

The move, he said, would also “ensure sufficient liquidity in support of economic activity” amid the pandemic which was seen causing a recession in the United States and other highly-developed economies.

With this cut, the amount of cash that the country’s largest financial institutions have to keep immobile in their vaults will now fall to 12 percent of their total holdings of deposits and other reserve liabilities.

In a separate statement, the central bank also said that, to properly calibrate the reduction in the reserve requirement, the Monetary Board also authorized the governor “to determine the timing, extent, and coverage of the reduction” in reserves, taking into consideration the impact of COVID-19 on the supply of cash.

“The authority given to the governor to adjust the reserve requirement allows the BSP flexibility to promptly address any possible liquidity strain in the industry,” the BSP said, adding that the board approved in principle a reserve reduction of up to 400 basis points.

This means Diokno has the discretion to reduce the ratio further by another 200 basis points.

“Potential cuts on the reserve requirements for other banks and non-bank financial institutions will also be explored,” the central bank said. “The BSP will issue guidelines on these operational adjustments.”

For further reserve requirement reductions, Diokno said the BSP will have to assess the impact of COVID-19 on the broader economy.

He added that the behavior of banks, particularly their capacity to absorb, invest and lend the extra cash, will likewise be a determining factor for further adjustments.

ING Bank Manila senior economist Nicholas Mapa said the central bank’s move can be likened to delivering all the medication and vitamins to the sick patient that is the Philippine economy.

“The medicines and vitamins will lay the groundwork to help the patient recover and fight the virus but the patient will need to survive and he will need to eat,” he said.

He added that a “fiscal rescue package” is also needed, “to give the ailing economy sustenance to survive this crisis and to keep it alive long enough for the medicines and vitamins to get the patient back to full health.”

“We expect BSP to offload another policy rate cut even before the May meeting and another 200 basis points worth of reserve requirement ratio reductions should market conditions remain tense,” Mapa added.

Edited by TSB