BSP trims reserve requirement imposed on banks: What it means to you

MANILA, Philippines — The Bangko Sentral ng Pilipinas on Thursday announced a 1 percentage point cut in the amount of reserves lenders need to park with the central bank, a move that could inject about P90 billion in the economy.

The BSP’s announcement came as a surprise to many, with some market watchers saying such a move could slightly build inflation pressures to the fast-growing Philippine economy, which they say is already at risk of overheating.

The central bank said the Monetary Board approved "operational adjustment" in reserve requirement ratio (RRR) by lowering the amount of reserves banks need to maintain with the BSP to 19 percent from 20 percent.

READ: Bangko Sentral trims reserve requirement imposed on banks

To note, the financial regulator’s statement was not made at a scheduled policy meeting.

Timing

“I was expecting a cut in the RRR, but I was a bit surprised that it came this early,” said Guian Angelo Dumalagan, market economist at the Land Bank of the Philippines.

“While this move was a slightly unexpected, this would be of great help for some banks who have experienced a decline in available funds following the bond offering of the government last year,” Dumalagan added.

The RRR reduction will take effect on March 2, as the BSP hopes to gradually lessen its dependence on the tool to manage cash circulating in the country’s financial system following the shift to the interest rate corridor system in 2016.

BSP Governor Nestor Espenilla, Jr. earlier said he personally wanted to see the RRR down to single-digit levels.

But for Ruben Carlo Asuncion, chief economist at UnionBank of the Philippines, the central bank’s decision to trim RRR this early was “planned and timed.”

“I’m expecting that this would be a gradual move to be able to manage market liquidity,” Asuncion said.

The Philippines’ previous 20 percent RRR was one of the highest ratios in Asia, forcing banks to keep a fifth of their cash holdings as standby funds that do not generate returns.

Minimal

For Dumalagan, the timing of the RRR cut was unexpected considering the forecast-beating spike in consumer prices last January, and following prior hints from some central bankers that slashing RRR could be deferred until inflation pressures moderate.

“If this move affects inflation, it might probably be minimal, although in the positive direction,” he said. “If inflation stabilizes towards the end of the year, perhaps the BSP could cut the RRR again by the same magnitude.”

Last month, consumer prices surged to a three-year high of 4 percent, which Espenilla partly attributed to the implementation of a new tax law that raised excise levies on fuel, sugary drinks and cigarettes, among others.

READ: Consumer prices surge to 3-year high in January

Amid the uptrend in inflation, some economists expect the central bank to lift rates in its upcoming policy-setting meetings.

According to University of Asia and the Pacific Senior Economist Cid Terosa, the reduced RRR will help taper inflation.

“The move will release money to the system to meet growing demand for money and stimulate investment activity... I believe this is an initial measure to curb inflation prior to changing policy rates,” Terosa said.

In the same statement on Thursday, the BSP assured the public that it has “ample scope” to mitigate any potential impact from the additional liquidity by offsetting auction-based monetary operations.

The central bank has been offering term deposit facilities (TDF) to help mop up excess liquidity. For the third straight week this year, the BSP has raised TDF offering to P110 billion on February 21 from P80 billion last Wednesday.

READ: TDF offer hiked to P110 billion