Monetary Board slashes bank reserves after policy rate cut




The Monetary Board (MB) has decided to slash bank reserve requirements by a total of 2 basis points, or 2 percentage points, to increase the country’s money supply and mitigate any tightness in domestic liquidity in the wake of the budget impasse in the first quarter.


The reduction in the reserve requirement ratios (RRR), which will be implemented in three tranches, was announced a week after the cut in the overnight reverse repurchase (RRP) facility by 25 basis points to 4.5%, the first in exactly a year of rising interest rates.


Read: Policy rates cut as economy slows, inflation weakens further


Bangko Sentral ng Pilipinas (BSP) Governor and MB Chairman Benjamin E. Diokno said the reduction will apply to the reservable liabilities of universal and commercial banks that are currently subject to a reserve requirement of 18 percent.


“The Monetary Board will review the potential cuts on the reserve requirements for other banks and non-bank financial institutions in the next round of reserve requirement adjustments,” Diokno announced after the MB’s meeting on May 16.


The reduction in the RRR, which will lower the amount of cash that banks are required to hold in reserves, will be implemented in three tranches: 100 basis points effective May 31, 2019; 50 basis points by June 28, 2019; and 50 basis points on July 26, 2019.


Diokno said the Monetary Board took note of the continued deceleration in the headline inflation rate, which was reported at 3% in April, well within the government’s target range of 2% to 4% for this year and next.


“In the first four months of 2019, average headline inflation fell within the National Government’s target band of 3.0 percent ± 1.0 percentage point at 3.6 percent. The BSP was also guided by the benign inflation forecasts of 2.9 percent for 2019 and 3.1 percent for 2020. Inflation expectations have likewise shown increasing convergence with the BSP’s inflation target,” Diokno said in a statement.


He said the board expects the adjustment to mitigate any tightness in money supply due to limited public expenditure following the budget impasse in the first quarter of the year.


“At the same time, the reduction in reserve requirements is part of the BSP’s broad financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs,” he added.


The cut in the RRP, effective May 10, was announced after the release of weak gross domestic product (GDP) results and the further slowdown in inflation. (Ventures Cebu)

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