Bankers, economists laud cut in banks’ reserves ratio

MANILA, Philippines — Bankers and economists were surprised but welcomed the decision of the Bangko Sentral ng Pilipinas (BSP) to trim the level of deposits that banks are required to maintain with the central bank starting next month.

The Bankers Association of the Philippines (BAP) said the central bank’s decision to reduce the reserve requirement ratio (RRR) to 19 percent from 20 percent and release P90 billion worth of funds would help sustain the country’s growth momentum as the government embarks on a massive infrastructure spending.

BAP managing director Benjamin Castillo said borrowers would have access to more sources of funds and more efficient cost of borrowing that is expected to propel more economic activity in the country.

“In a few weeks, we expect that BAP member banks will be able to extend additional credit to consumers and enterprises that require adequate funds for their personal and business needs,” he said.

He said the decision of the BSP to gradually reduce the RRR clearly demonstrates a strong regulatory framework and supports its ability to further manage liquidity while policy rates are within its framework to continuously promote economic growth.

Edwin Bautista, president and CEO of Aboitiz-led Union Bank of the Philippines, said the timing of the central bank’s decision was surprising.

“Yes, surprised because of all the talk going on (was) regarding inflation and the need to raise interest rates,” he said in a text message.

Bautista said the reduction was not significant but would send the signal the BSP means business.

“So I guess it was to send a message – that we are reducing bank intermediation cost,” he added.

Despite the cut, the country’s reserve level remains the highest in Asia compared to China’s 18.5 percent, Indonesia’s 6.5 percent, Malaysia’s 3.5 percent, Vietnam’s three percent, Korea’s two percent, Thailand’s one percent, and Japan’s 0.8 percent.

ING Bank Manila senior economist Joy Cuyegkeng echoed Bautista’s observation that the move was a surprise monetary easing.

“The cut in the RRR is consistent with our perception of a dovish BSP bias following last week’s statement on policy rates and upwardly-revised inflation forecast,” he said.

The cut supports the view of greater tolerance towards a weaker currency, according to Cuyegkeng.

“The cut would still be seen as the BSP providing further stimulus to the system by encouraging banks to maintain lending and also to support the government’s financing needs. We expect the currency to weaken,” he said.

Noelan Arbis, economist at British banking giant HSBC, said the move may seem surprising at first glance in an environment of accelerating inflation and rate hike expectations.

Inflation kicked up to its highest level for more than three years at four percent in January from 3.3 percent in December due to rising oil prices and the first round effects of the implementation of Republic Act 10963 or the Tax Reform For Acceleration and Inclusion (TRAIN) law.

This prompted the BSP to raise its inflation forecast to 4.3 instead of 3.4 percent for this year and to 3.5 instead of 3.2 percent for 2019. The BSP has set an inflation target of two to four percent between 2018 and 2020.