BSP to cut reserve requirement to 16%

The Monetary Board (MB) of the Bangko Sentral ng Pilipinas (BSP) has decided to reduce the reserve requirement ratio (RRR) by 200 basis points to 16%, a week after easing key policy rates.

BSP Governor Benjamin Diokno on Thursday afternoon said the MB decided to reduce the reserve requirement ratio in three stages — by 100 basis points (bps) effective May 31; 50 bps effective June 28; and another 50 bps effect 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 in a text message.

Currently at 18%, the reserve requirement, the amount of cash a bank must hold in its reserves against deposits made by customers of the Philippines, is among the highest across the globe.

The BSP last year also reduced the RRR by 200 basis points, as part of the central bank's shift toward a more market-based implementation of monetary policy.

In March, Diokno already hinted at the possibility of easing the RRR once every three months during the next four quarters.

Former BSP Governor Nestor Espenilla Jr. said he wanted to cut the RRR to "single-digit" during his term which was supposed to end in 2023, but he passed away in February after battling tongue cancer for more than a year.

'Boost to the economy'

The latest development was welcomed by the Bankers Association of the Philippines (BAP), which said that the reduction would be a boost to the economy as inflation continues to slow.

"The 2% cut in reserve requirements recognizes the BSP’s effectiveness in strengthening the country’s banking system," BAP president Cezar Consing said in a separate statement.

"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," he elaborated.

The MB last week decided to reduce key policy rates by 25 basis points, marking the first rate cut in over six years.

"We think the cut is a positive for economic growth as domestic liquidity and aggregate demand will be augmented, especially un light of the disappoint 1Q GDP print caused by the delayed budget passage and a tepid trade component," Robert Dan Roces, chief economist at Security Bank, said in an emailed commentary.

Economic growth was recorded at 5.6% in the first quarter of the year, the slowest in four years, which the government attributed to the failure of Congress to pass the 2019 budget on time.

"As the RRR cuts are done in a gradual, managed nature, its end goal will be to bring down financial intermediation costs, as well as orienting monetary instruments to become more market-based, thereby leading to better credit growth that goes into capital formation and consumption," said Roces. — RSJ, GMA News