BSP cuts reserve ratio, flags rate lull

By Keisha B. Ta-asan, Reporter

THE BANGKO SENTRAL ng Pilipinas (BSP) on Thursday cut banks’ reserve requirement ratio effective June 30, while signaling that it would not touch the key rate.

The central bank would cut the ratio for universal and commercial banks and nonbank financial institutions with quasi-banking functions by 250 basis points (bps) to 9.5%, BSP Governor Felipe M. Medalla told reporters.

It will also cut the ratio for digital banks by 200 bps to 6% and by 100 bps for thrift banks, and rural and cooperative banks to 2% and 1%, respectively.

“There will be some liquidity effects, that’s why we are planning to introduce the 56-day bills on that point so that we can mop up any excess liquidity effects of that cut in reserve requirements,” Mr. Medalla said.

The central bank will offer 56-day securities on June 30, along with the auction of the 28-day debt, to mop up excess liquidity in the financial system.

“This operational adjustment is in line with the BSP’s ongoing efforts towards a more active and flexible approach to liquidity management through market-based monetary operations,” the BSP separately said in a statement.

It is committed to bringing down the reserve requirement ratio of big banks to single digits by 2023.

The central bank last cut the ratio in 2020 — by 200 bps for big banks in April that year and by 100 bps for thrift and rural banks three months later.

The reserve ratio cut is meant to facilitate the central bank’s shift to market-based instruments for managing liquidity in the financial system, particularly the term deposit facility and BSP securities.

“The reduction in reserve ratios is intended to coincide with the expiration of alternative modes of compliance with reserve requirements by end-June 2023 and thereby ensure stable domestic liquidity and credit conditions,” the BSP said.

During the pandemic, the Philippine central bank allowed lenders to count their lending to micro, small and medium enterprises (MSME) and pandemic-hit large enterprises as part of their compliance with the reserve requirement for deposit liabilities and substitutes.

The pandemic relief will expire on June 30.

The reserve ratio cut will infuse about P325 billion into the financial system, Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said in a note.

But this would be siphoned off with the coming 56-day BSP securities to help stabilize the peso and inflation “given the need to manage any potential inflationary impact should there be more pesos infused in the local financial system,” he said.

The central bank is also fulfilling its promise to bring down big banks’ reserve ratio to single digits to better align with other countries in the region, he added.

“The latest move was a surprise given that the BSP has been telegraphing a 200-bp cut in the reserve requirement ratio previously,” Domini S. Velasquez, chief economist at China Banking Corp., said in a Viber message. 

“But it might be because of their revised estimates on the effect of the expiration of the relief extended to MSMEs,” she said. “Given BSP’s statement, we do not expect any change in monetary policy or do not interpret this as easing of monetary policy in this period of still elevated inflation — very far still from the target of 4%.”

The lower reserve requirements do not signal a shift in the BSP’s policy settings, according to the central bank.

“The BSP continues to prioritize bringing inflation back towards a target-consistent path over the medium term and will continue to signal its monetary policy stance through the key policy interest rate,” it said.

Mr. Medalla said the Monetary Board would likely keep rates at 6.25% due to easing inflation. “The pause is very likely to continue because the recent data actually is consistent.”

Last month, the Monetary Board paused its aggressive monetary tightening and signaled it would keep the key rate on hold until the third quarter. The BSP has raised policy rates by 425 bps since May last year to tame inflation.

Inflation cooled for a fourth straight month in May to 6.1% — the lowest in a year. Still, it breached the central bank’s 2-4% goal for the 14th straight month. To date, inflation has averaged 7.5%.

Mr. Medalla said any cuts in the key rates would depend on the actions of other central banks including the US Federal Reserve, which could weaken the peso.

“If inflation is quite low, the consideration of the exchange rate effect becomes weaker, then that could result in a cut for the year,” he said.

If inflation is just “near the edge” of the 2-4% target, “we cannot ignore the potential exchange rate effects of rate cuts.”

The US central bank has cut borrowing costs by 500 bps since March last year, bringing the Fed fund rate to 5-5.25%. The Fed is set to meet on June 13-14.    

“If we think it’s still uncertain, then we will not cut,” Mr. Medalla said. “It will depend on the data, and it will depend on which risk we are more afraid of.”

The BSP will meet on June 22 to discuss policy.