Monetary conditions better after RRR cut — BSP
Mary Grace Padin (The Philippine Star) - January 20, 2020 - 12:00am

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) said the liquidity condition of the banking system has been gradually improving since it started to reduce the reserve requirement ratio (RRR) of banks.  

In a press briefing, BSP Governor Benjamin Diokno said that the 400-basis point cut in RRR may not be immediately felt due to the lagged impact of monetary policy on the economy. 

“Monetary policy works with a lag. So when we release such amount in the system, we don’t expect an immediate response. I think that’s...within the response to reality that they are not ready yet,” Diokno said.

While the additional liquidity is still trying to make its way into the economy, Dennis Lapid, director of the BSP’s Department of Economic Research, said excess funds released through the RRR cut are being re-absorbed by the central bank through its term deposit facility.

Still, Lapid said that there have been gradual improvements in monetary conditions as a result of the reduction in bank reserves.

“In terms of the impact on the system, we re-absorbed some of the liquidity but if you look at the market interest rates, (they) actually have gone down. Financial lending rates are down by 100 basis points over the past year, short-term inter-bank lending rate is lower by 120 basis points,” the BSP official said.

“So there is a gradual and general easing in fund conditions in the market,” he said.

Furthermore, Lapid said there has been an improvement in liquidity conditions, as shown by domestic liquidity (M3) and bank lending figures.

“Look at latest M3 and bank lending numbers. It increased by about 10 percent for bank lending and M3 is 9.8 percent, so it shows a gradual pickup in liquidity and specifically bank lending activity,” he said.

According to the latest data from the BSP, domestic liquidity expanded by 9.8 percent year-on-year to P12.4 trillion in November last year.

Bank lending, net of reverse repurchase (RRP), likewise grew by 10.1 percent to P8.95 trillion in November last year.

The BSP has lowered the reserve requirement ratio for big and mid-sized banks by 400 basis points and for small banks by 200 basis points to free up additional funds into the financial system to boost the economy.

Every 100-basis point cut in bank reserves is estimated to inject about P90 billion to P100 billion in additional funds into the banking system.

Furthermore, benign inflation environment and slower than expected gross domestic product (GDP) growth allowed the BSP to slash interest rates by 75 basis points last year, partially unwinding a tightening cycle that saw rates jump by 175 basis points in 2018 as inflation spiraled out of control.

Economists expect the central bank to resume its easing cycle this year after a prudent pause in the last few months of the year to allow previous monetary actions to work its way through the economy.

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