In an anticipated move, the Bangko Sentral ng Pilipinas (BSP) yesterday said it will implement a reduction in banks’ reserve requirement ratios (RRRs) to “ensure stable domestic liquidity and credit conditions” as relief measures implemented during the pandemic are due to end.
Starting June 30, RRRs of universal and commercial banks and non-bank financial institutions with quasi-banking functions will be lower by 250 basis points, digital banks by 200 basis points and for thrift banks, rural banks and cooperative banks by 100 basis points .
This measure shall bring the RRRs of big banks to 9.5 percent from the current 12 percent, digital banks to 6 percent from 8 percent, thrift banks to 2 percent from 3 percent and rural and cooperative banks to 1 percent from the current 2 percent.
RRRs are the amount of funds a bank holds in reserve to ensure it is able to meet liabilities in case of sudden withdrawals. RRRs are a tool used by central banks to increase or decrease the money supply in the economy and influence interest rates.
The BSP last reduced banks’ RRRs in March three years ago by 200 basis points to help cushion the impact to the financial system of the coronavirus pandemic.
Felipe Medalla, BSP Governor, said the new ratios shall apply to the local currency deposits and deposit substitute liabilities of banks and non-banks with quasi-banking functions (NBQBs).
“The reduction in reserve ratios is intended to coincide with the expiration of alternative modes of compliance with reserve requirements by end-June 2023 and thereby ensure stable domestic liquidity and credit conditions,” Medalla said in a statement.
Michael Ricafort, RCBC chief economist, said the move would infuse about P325 billion into the financial system, or about P130 billion for every 1 percentage point cut.
“(This means) More peso supply infused into the market. More peso could be used for lending activities, government securities, equities, forex, among others.”
But Ricafort said the excess liquidity will likely “be siphoned off with the upcoming 56-day BSP bills also starting June 30, 2023.”
Ricafort said the cut is also “fulfilling the promise a few months ago to bring down the large banks’ RRR to single digit levels by the end of the BSP governor’s term on June 30, 2023.”
Ricafort added the cut will align the Philippines’ RRRwith the rest of the Asian region mostly at single-digit RRRs.
Domini Velasquez, ChinaBank chief economist, said the latest move was a surprise given that the BSP has been telegraphing a 200- basis points cut in RRR previously.
“But it might be because of their revised estimates on the effect of the expiration of the relief extended to MSMEs. Given BSP’s statement, we do not expect any change in monetary policy or do not interpret this as easing of monetary policy in this period of still elevated inflation–very far still from the target of 4 percent,” Velasquez said.
“Any adjustments, whether in policy rate cuts or further reduction in RRR that would affect money supply, will likely come in the fourth quarter, at the earliest,” she added.
Medalla said the lower reserve requirements “do not constitute any shift in the BSP’s monetary policy settings.”
“The BSP continues to prioritize bringing inflation back towards a target-consistent path over the medium term and will continue to signal its monetary policy stance through the key policy interest rate, or the rate on the overnight reverse repurchase facility,” Medalla said.
He said the operational adjustment is in line with the BSP’s ongoing efforts “towards a more active and flexible approach to liquidity management through market-based monetary operations.”
For the fourth consecutive month, inflation slowed down further in May to 6.1 percent in May from 6.6 percent in April but year-to-date average inflation rate stood at 7.5 percent, still above the government’s full-year target range of between 2 and 4 percent.
“The Monetary Board will review its assessment of the inflation and macroeconomic outlook in the monetary policy meeting on June 22. The BSP stands ready to adjust the monetary policy stance as necessary to prevent the further broadening of price pressures as well as the emergence of additional second order effects. The BSP also supports for the timely and effective implementation of non-monetary government measures to mitigate the impact of persistent supply-side pressures on inflation,” Medalla said.
Foreseeing a gradual return of inflation to the target band of between 2 and 4 percent, the Monetary Board last May decided to keep the key rate of the BSP at its current but still at 16-year-high level of 6.25 percent.
The interest rates on the overnight deposit and lending facilities were also kept at 5.75 percent and 6.75 percent, respectively.
To combat high consumer prices, the Monetary Board has increased the key rate 9 consecutive times since May, 2022, totaling 425 basis points.
