BSP cuts banks' reserve requirement

The Bangko Sentral ng Pilipinas (BSP) said yesterday it had cut banks’ regular reserve requirement by two percentage points and doubled its budget for a peso rediscounting facility in fresh moves to ease liquidity, BSP said.

The BSP has been making a series of moves but officials hinted this was not to be the last, saying that the Monetary Board would “act as warranted” to shield the local financial system from the global financial crisis.

Effective Nov. 14, BSP Governor Amando M. Tetangco Jr. said the regular reserve requirement on bank deposits and deposit substitutes would be reduced by two percentage points.

At the same time, the MB also approved the increase in the BSP’s peso rediscounting budget from P20 billion to P40 billion, effective immediately.

“The two measures are aimed at pre-emptively ensuring the proper functioning of the interbank market and guarding against a possible liquidity or credit tightness arising from the global rise in risk aversion,” Tetangco said.

The BSP’s move was announced after the European Central Bank decided to reduce its key policy rates by 50 basis points and the Bank of England decided on a 150-point rate cut.

Major economies have been struggling to jumpstart interbank lending which has been frozen solid because banks were too nervous to lend to each other until the dust had settled on the financial meltdown.

Sooner or later, monetary officials said this freeze would extend to the real sector, with banks too scared to lend to anybody at all. Tetangco said this would cause economic activities to grind down to a halt unless liquidity was flushed into the system.

Tetangco said the Philippine financial system was not in such dire straight as other markets in the thick of the meltdown but said the BSP wants to take preemtive actions.

According to Tetangco, the reduction in reserve requirement has been in the BSP’s medium-term policy objective anyway since this would lower banks’ intermediation costs.

“The Monetary Board believes that present conditions provide room for a calibrated reduction,” Tetangco said.

The increase in the BSP’s rediscounting budget, on the other hand, would allow more banking institutions to obtain loans from the BSP against eligible promissory notes for short-term liquidity requirements.

Tetangco said there was no detectable tightness in liquidity but said the market wants more reassurance that the market would remain liquid. Since the BSP had room, he said these adjustments could be used to head it off be considered.

This week’s policy measures are expected to release even more liquidity into the system but Tetangco did not appear keen on going for the BSP’s ultimate weapon of reducing interest rates.