BSP to go slow in cutting bank reserves

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Bangko Sentral ng Pilipinas Governor Benjamin Diokno (FILE PHOTO)

Metro Manila (CNN Philippines, December 18) — Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno said cuts in the reserve requirement for banks in 2020 would not be as aggressive as this year.

In his early-heads up for market watchers, Diokno insisted that players can expect interest rates to go down by at least 50 basis points (bp) in 2020, but that reductions in the reserve requirement ratio (RRR) will be slower.

"The RR cut, medyo mabagal kami doon [we'll go a little slow on that]. But on the interest rate, at least 50 basis points. That's the forward guidance for next year," Diokno told reporters on Tuesday night.

"We want investors, businessmen to be able to predict so we provide forward guidance."

This would follow cuts worth 75 bp unleashed this year. The succession of rate cuts would unwind tightening moves introduced in 2018, when monetary policy makers had to raise borrowing rates to curb surging inflation.

The BSP kicked off the waves of easing in May, August, and September as inflation cooled, coming from hitting near-decade highs last year. The concrete projections in rate cuts are a departure from previous central bank officials who would only say that they will remain "data dependent" in setting benchmark yields.

Banks and other lending firms use the BSP's rates as their benchmark in setting loan, credit card, and deposit rates. Inflation has maintained its slowdown this 2019 to hit a fresh three-year low of 0.8 percent in October, before slowly inching back up the next month.

On Wednesday, the central bank announced that the government has kept its 2-4 percent annual inflation target until 2022, as economic managers expect price increases to remain stable in the next three years. 

"While price volatilities cannot be ruled out, inflationary impulses from international commodity prices are expected to remain modest," the BSP said.

Meanwhile, Diokno has slashed the RRR by a total of 400 bps to 14 percent by yearend for universal and commercial lenders, referring to the share of deposits which banks must keep intact in their vaults.

Every percentage point reduction in RRR is said to unleash about ₱100 billion in cash to the economy. This should arm banks with more money to lend.

The central bank chief said they are still evaluating if the additional cash is being used by banks to grant additional loans, or if the money is simply invested in short-term deposits and investments.

Diokno said he still wants to bring the RRR to 9 percent by mid-2023, or when Diokno ends his term as governor. He said he has 14 quarters left to spread out reserve cuts worth 500 bps.

"We're comfortable where we are," he added.