By Lee C. Chipongian
The country’s big banks called the Bangko Sentral ng Pilipinas’ (BSP) 200 basis points (bps) move to cut reserve requirement ratio (RRR) and releasing almost P200 billion in fresh liquidity a “bold move” as it follows the Monetary Board’s easing of benchmark rates last week.
Bankers Association of the Philippines (BAP) president, Cezar P. Consing, said the two percent cut in RRR from 18 percent to 16 percent will strengthen the industry.
“It is a bold move, coming on the heels of a policy rate cut, but equally appropriate given how our financial system has advanced under the BSP’s stewardship,” said Consing who is also the president and CEO of Bank of the Philippine Islands.
The statement from the BAP also said that the reduction of the RRR, viewed mostly by economists as pro-growth, is “a complementary boost to our national economy with inflation slowing down to a 16-month low.”
Consing expressed optimism that both the policy rate and RRR reduction will spur growth and boost momentum after the budget impasse slowed down GDP growth in the first quarter 2019.
“(Both BSP actions) will sustain the growing economic momentum of the Philippines (and BAP) is confident that the BSP will continue to exercise its regulatory role effectively as catalyst to bolster economic growth and consumer confidence in the banking industry,” said Consing. The BSP will reduce RRR imposed on universal and commercial banks in three stages, the first is on May 31 with a 100 bps cut, followed by 50 bps each on June 28 and July 26, BSP Governor Benjamin E. Diokno announced last Thursday.
After the BSP decided on May 9 to cut the overnight reverse repurchase rate by 25 bps, the market had expected the RRR reduction to follow immediately and the Monetary Board led by Diokno did not disappoint.
It was only a matter of timing, said BSP Deputy Governor Diwa C. Guinigundo. He earlier cautioned an untimely lowering of the RRR because such premature action may not help the economy at all and could in fact lead to a weaker peso and with the additional liquidity, might be inflationary.
“Very few seem to realize that prematurely lowering the RRR could exacerbate monetary conditions and hurt growth even more,” Guinigundo said previously. He said no one could guarantee that the liquidity to be released by an RRR cut would be used to fund economic growth.
Guinigundo has also been saying that the tightness in the system or liquidity pressures are only transitory conditions. He has pointed out that the government via its issuance of retail treasury bonds, has actually been doing the BSP’s job of mopping up excess liquidity since after banks acquire these bonds, they park it with the central bank.
Guinigundo also noted that in reading current domestic liquidity or M3 conditions, it is more appropriate to look at the ratio of M3 to gross domestic product (GDP) which would indicate that there are no tightness in the financial system since M3 to GDP has been expanding to reach the 60 percent level versus M3’s 9.2 percent.