BSP announces three bank reserve cuts in one go

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Metro Manila (CNN Philippines, May 16) — The Bangko Sentral ng Pilipinas (BSP) is trimming the reserve requirement on big banks in three successive adjustments, a fresh move seen to further reduce borrowing costs.

BSP Governor Benjamin Diokno announced on Thursday that the Monetary Board decided to slash the reserve requirement ratio (RRR) for universal and commercial banks in three moves, beginning with a 100 basis point (bp) cut effective May 31.

The current RRR is 18 percent.

This comes a week after the BSP reduced benchmark interest rates by 25 bp, which is its first loosening move after a series of rate hikes in 2018. The key policy rate now stands at 4.5 percent, with benchmark yields ranging from 4-5 percent.

A succeeding 50 bp cut will take effect June 28, while another 50 bp will kick in by July 26. By that time, the RRR will be down to 16 percent.

Diokno added that the RRR for smaller banks "will be considered in the next MB meeting," which is set for June 20.

This is the first time in recent history when monetary officials rolled out RRR cuts in a span of three months. The RRR has been lowered in two equal moves worth 100 bp in March and June last year, in keeping with the vision of the late BSP Governor Nestor Espenilla, Jr.'s for a single-digit reserve level by 2023.

The reserve standard once stood at a record-high of 20 percent — among the highest in the world.

Lenders have been calling for a lower RRR, saying that this is effectively a tax on banks as they are forced to keep a substantial portion of deposits intact rather than use them to grant more loans.

"This is very good for the financial system. More funds are freed up for economic activities and expansion," said Ruben Carlo Asuncion, chief economist at the Union Bank of the Philippines.

Robert Dan Roces, chief economist at Security Bank Corp., said softer economic growth — which clocked in at a four-year low of 5.6 percent in the first quarter — as well as slower bank lending and money supply expansions justify the successive easing measures.

"As the RRR cuts are done in a gradual, managed nature, its end goal will be to bring down financial intermediation costs, as well as orienting monetary instruments to become more market-based, thereby leading to better credit growth that goes into capital formation and consumption," Roces said in a commentary sent to reporters. "The depreciation of the peso, if any, will also be ideal for the export sector, one of the major underperformers of the economy in 1Q."

Diokno previously said that cuts to the policy rate and the RRR are inevitable, but that they need good timing to unleash these unwinding measures. He previously bared that he is considering a 100 bp cut in the reserve standard per quarter for four successive quarters to hasten the process.

Lowering the RRR by one percentage point is said to unleash about ₱100 billion to the economy.