The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, on Thursday reduced again the reserve requirement ratio of banks by one percentage point to free up more liquidity into the market.
The Bangko Sentral said the RRR was reduced to 18 percent from 19 percent. It said the move was a part of its broad medium-term financial market reform agenda.
The reduction in the reserve requirement ratio would take effect June 1, 2018. This followed a similar one-percentage cut in RRR in March.
Reserve requirement or cash reserve ratio is a central bank regulation that sets the minimum amount of reserves that should be held by a commercial bank.
“The reduction will apply to those reservable liabilities of all banks and non-bank financial institutions with quasi-banking functions that are currently subject to a reserve requirement of 19 percent,” the Bangko Sentral said.
ING Bank Manila senior economist Joey Cuyegkeng said the RRR cut was expected by the market. “The market takes this for now as a liquidity infusion which is seen to ease short-term rates,” he said.
Cuyegkeng said the RRR reduction along with the maturity of P130 billion worth of fixed-rate treasury notes would further weigh on the peso which closed at a near 12-year low of 52.55 against the US dollar Friday.
Bangko Sentral said the gradual and phased reduction in reserve requirement ratios was part of the shift toward a more market-based implementation of monetary policy to gradually reduce reliance on reserve requirements for managing liquidity in the financial system.
The Monetary Board said the shift to the auction-based monetary operations under the interest rate corridor framework allowed the BSP to provide more effective guidance to short-term market interest rates which should help facilitate healthy price discovery on the cost of funds in the financial system.
“The reduction in reserve requirements is also part of the BSP’s broad financial sector reform agenda to promote a more efficient financial system by lowering intermediation costs,” it said.
The Monetary Board said the calibrated reductions in reserve requirement ratios were not intended to signal any change in the prevailing monetary policy stance, as the BSP continued to have the scope to offset their potential liquidity impact via an expansion in auction-based monetary operations.
“Shifts in the monetary policy stance will continue to be signaled through adjustments in the policy rate, which will, in turn, continue to depend primarily on the BSP’s outlook for inflation as informed by economic data,” it said.
The BSP said it attained sufficient progress in its shift towards the use of market-based monetary instruments since the adoption of the interest rate corridor framework in June 2016.
The Monetary Board said the reduction in reserve requirements would help mobilize liquidity in support of economic activity and capital market development over the medium term.
Bangko Sentral Governor Nestor Espenilla Jr. earlier announced the plan to gradually reduce the reserve requirement ratio to a single-digit level. He said there was a need to inject more liquidity into the financial system to satisfy the needs of the national economy.
Several bankers expressed full support behind the plan, saying the move would allow more liquidity in the market.
BDO Unibank Inc. treasurer Pedro Florescio said reducing the RRR would be vital in improving the lending capacity of banks.
“Lowering the RRR will allow banks to boost its lending capacity providing a continuous supply of credit for consumers and businesses,” Florescio said in a statement earlier.
