BSP makes unexpected RRR cut for banks

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) delivered yesterday another surprise reduction in the level of deposits banks are required to keep with the central bank as part of efforts to boost economic activity.

The BSP approved the reduction of the reserve requirement ratio (RRR) for big and mid-sized banks by another 100 basis points effective December.

The announcement surprised the market as the earlier 100 basis points reduction in the RRR for universal, commercial, thrift as well as rural banks is scheduled to take effect in the first week of November.

“The reserve requirement reduction is in line with the BSP’s broad financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs,” the BSP said.

The additional reduction brings to 400 basis points the total reduction for big and mid-sized banks, while the RRR for small banks has been lowered by 200 basis points.

The 100 basis points reduction scheduled early December is expected to free up over P100 billion that could be used by banks to boost their lending portfolio.

“At the same time, the adjustment in reserve requirement ratios is aimed to ensure sufficient domestic liquidity in support of economic activity,” the central bank said.

With the reduction, the RRR for big banks as well as non-bank financial institutions with quasi-banking functions will be pegged at 14 percent, while that of thrift banks will now be at four percent.

Bank of the Philippine Islands lead economist Jun Neri said the decision to further slash the RRR is “a proactive and timely one that should help mitigate the impact of global headwinds and this year’s public sector underspending on the country’s gross domestic product (GDP) growth.”

“This should also increase the probability of Philippine GDP growth getting back to the six to seven percent range by next year,” Neri said.

Michael Ricafort, economist at Rizal Commercial Banking Corp. (RCBC), said the fresh RRR reduction was indeed a surprise.

Ricafort said every one percentage points cut in RRR would infuse about P110 billion in additional funds into the banking system.

“This will further spur economic activities and faster GDP growth. This surprise cut in RRR by one percentage point effective December could support sentiment on the local financial markets,” Ricafort said.

The late BSP governor Nestor Espenilla Jr. had committed to lower the ultrahigh RRR from 20 percent in 2018 to single digit level by 2023.

BSP Governor Benjamin Diokno earlier hinted the central bank is likely done with its easing cycle at least this year after slashing interest rates by 75 basis points due to the continued downtrend in inflation.

The BSP has two more rate-setting meetings remaining for 2019 scheduled on Nov. 14 and Dec. 12.

The Monetary Board has delivered three rate cuts this year, 25 basis points each last May 9, Aug. 8, and Sept. 26 as part of an easing cycle amid the continued downtrend in inflation as well as slower-than-expected gross domestic product (GDP) growth.