BSP slashes bank reserves to pump more cash amid COVID-19 economic slowdown

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(FILE PHOTO)

Metro Manila (CNN Philippines, March 24) — The Bangko Sentral ng Pilipinas followed through with another liquidity and confidence booster, this time slashing bank reserves to spur more lending and increase economic activity.

BSP Governor Benjamin Diokno announced Tuesday a 200 basis point (bp) cut in the reserve requirement ratio or RRR for universal and commercial banks. The move was approved during a special meeting of the Monetary Board and will take effect March 30.

Starting next week, big banks will only have to keep 12 percent of total deposits intact, effectively freeing up at least ₱180 billion which banks can lend at a cheaper rate.

"The RR cut is intended to calm the markets and to encourage banks to continue lending to both retail and corporate sectors," Diokno said.

In a statement, the Monetary Board said Diokno has been authorized to roll out a 400 bp reduction in the reserve standard this year. Next Monday's cut would be the first in what could be a series of adjustments, the timing and magnitude of which would be upon the discretion of the central bank chief.

The planned RRR cuts this year matches the actual reductions in 2019, and would bring Diokno even closer to bringing reserves down to single-digit level targeted by 2023 much sooner.

For the longest time, banks were required to keep 20 percent of total deposits on hand — among the highest in the world. Financial firms liken this to a tax on banks, as they could not make productive use of the funds.

Diokno added that adjustments to the RRR for thrift, cooperative, and rural banks as well as non-bank financial firms "will be explored."

In timing the next reserve cuts, Diokno said authorities will assess the capacity of banks to absorb, invest, and lend the freed up cash, as well as potential money supply strains that may come in the next few months.

Monetary war chest

The central bank's move comes a day after it announced that it will make available ₱300 billion funds for the national government via a bond repurchase deal with the Bureau of the Treasury. The BSP essentially granted a loan to the state, which must be repaid in six months. The agreement preceded the passage of a bill granting extraordinary powers to President Rodrigo Duterte to realign funds under the 2020 national budget for the country's COVID-19 response.

Last week, the BSP also announced an "assertive" 50bp interest rate cut meant to uplift market confidence amid the Luzon-wide quarantine to contain the coronavirus outbreak. This reduced the benchmark interest rate, effectively pulling loan rates in the market down.

In December, Diokno said the BSP would go slow on RRR cuts as they need to check first how the banking system will respond to being awash with cash. However, the COVID-19 outbreak proved to be a game changer, with central banks worldwide scrambling to keep economies afloat as lockdowns paralyze consumption and business activity.

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The entire Luzon, including the country's main financial hub Metro Manila, has been placed under enhanced community quarantine until mid-April as government struggles to contain the spread of the disease.

The central bank earlier said that COVID-19 would weigh down economic growth for the rest of 2020 before a strong rebound next year. Latest forecasts by international credit raters pegged full-year expansion around 4 percent, a far cry from the state's 6.5-7.5 percent target.

‘Liquidity bazooka’

The central bank’s interventions put monetary policies on the front line as authorities hope to save the economy from the ill effects of this public health crisis. On Monday, professors from the University of the Philippines School of Economics laid out a host of recommendations in handling the COVID-19 outbreak, among them “unconventional” policy measures from the BSP.

“The Reserve Bank of Australia, the European Central Bank, and the US Federal Reserve have all committed to do ‘whatever it takes.’ The BSP should likewise send a strong message to the country that it will do the same: there should be no such thing as off-limits in its commitment to see the economy through this crisis by providing the ammunition to ensure that liquidity and credit markets do not dry up,” read the discussion paper titled “A Philippine Social Protection and Economic Recovery Plan.

Among the suggested artillery in this “liquidity bazooka” are the issuance of long-term bonds and debt purchases — exactly what has been rolled out so far — in line with the BSP’s role as lender of last resort.

Union Bank of the Philippines chief economist Ruben Carlo Asuncion said the adjustments are meant to “stave off a potential recession” in the domestic economy.

Separately, ING Bank senior economist Nicholas Antonio Mapa said that much more is needed to pull up market sentiment beyond what the BSP can offer.

“We can liken the economy to a sick patient with monetary policy delivering all the medication and vitamins to help in the recovery. The medicines and vitamins will lay the groundwork to help the patient recover and fight the virus but the patient will need to survive and he will need to eat,” Mapa said in a market commentary. “This is where the fiscal rescue package is needed, to give the ailing economy sustenance to survive this crisis and to keep it alive long enough for the medicines and vitamins to get the patient back to full health."

“With central banks here and abroad, we wonder when the fiscal side will come in and join the rescue,” Mapa added.