By Reicelene Joy N. Ignacio
FRESH from slashing benchmark interest rates just a week ago by 25 basis points in the face of easing inflation and slowing economic growth, the Bangko Sentral ng Pilipinas (BSP) on Thursday fired off a 200-basis-point (bp) phased reduction in big banks’ reserve requirement ratio (RRR).
The move follows a cumulative 200 bp RRR cut last year to 18%, described by BSP Governor Benjamin E. Diokno in his first press briefing in his current post early last March as still “really high.”
“The Monetary Board decided today to reduce the RRR by 200 bps — from 18% to 16% — to be implemented in three stages: 100bps effective May 31, 50bps effective June 28 and 50bps effective July 26,” Mr. Diokno told reporters in a mobile phone message, adding: “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.”
He said on March 12 that RRR cuts could amount to “one percentage point every quarter for the next four quarters.”
Asked if more cuts can be expected this year, BSP Deputy Governor Diwa C. Guinigundo said in a text message: “Not sure.”
“Depends on system liquidity in the near future and outlook on inflation.”
The BSP estimates that each percentage point cut releases P90-100 billion into the economy.
Headline inflation slowed for the sixth straight month to a 16-month-low three percent in April after the pace picked up for nine straight months to a nine-year-high 6.7% in September 2018 that was sustained in October. Year-to-date inflation has averaged 3.6% — within the BSP’s 2-4% target range though still above a 2.9% full-year forecast average, after 2018’s decade-high 5.2%.
In a May 16 note, Euben Paracuelles, Nomura’s senior economist for Southeast Asia, said while the BSP did not explain its latest “relatively aggressive” policy step, “this is likely a response to the tightening of liquidity conditions, which may ultimately affect the growth outlook if left unchecked.”
“While BSP also did not provide any forward guidance, we believe this was part of BSP’s medium-term goal… to reduce the level of the RRR to single digits by 2023 at the end of Diokno’s term,” he added. “This implies at least 200bp of RRR cuts per year until 2023…”
“However, we think the pace of the cuts could also be accelerated, given BSP’s new charter allows it to issue its own debt instruments as a tool for monetary operations, in addition to the term deposit facility to absorb excess liquidity under its interest rate corridor framework…”
Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said via text, “This is very good for the financial system”, explaining that “[m]ore funds are freed up for economic activities and expansion.”
Michael L. Ricafort, economist of the Rizal Commercial Banking Corp., said in a separate text that “[t]he latest cut in large banks’ RRR, by a total of 2 percentage points to 16%, would increase peso liquidity in the local financial system by a total of about P180 billion.”
“Thus, local interest rate benchmarks… would fundamentally go down/ease,” he added.
“The latest RRR cut should be generally positive for the local financial markets and the economy in terms of greater amount of funds/loans to be made available by banks to consumers/households and businesses, which spur greater economic activities and faster gross domestic product (GDP) growth.”
Nicholas Antonio T. Mapa, ING Bank N.V. Manila’s senior economist, said that “[w]ith 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 [a four-year-low] 5.6% [in the first quarter].”