BSP reaches into toolkit for another kind of cut

After hitting the pause button on rate reductions, the Bangko Sentral ng Pilipinas (BSP) announced it will lower the ratio of funds that banks and financial institutions are required to hold as reserves.

While that’s a win for banks, many may ask: what kind of policy move will follow?

On Feb. 21, the BSP announced that the reserve requirement ratio (RRR) for big banks will be reduced by 2 percentage points (ppts) to 5.0%, effective on March 28. Digital lenders’ RRR will be lowered by 1.5 ppts to 2.5%, while the requirement will be eliminated for thrift banks.

Before the announcement, BSP Governor Eli Remolona Jr. continued to signal that they remain on an easing cycle. He also added that a potential RRR cut – described as a more “neutral” action – could come sooner than expected.

Related article: BSP Update: Defying expectations with steady rates

Banks win

Central bank watchers typically see an RRR cut releasing more money into the financial system, allowing lenders to fund production and investment.

Still, lenders may choose to park the freed-up funds with the BSP’s overnight or term deposit facilities to generate relatively high yet risk-free returns. Thus, banks will gain from the RRR reduction, while lending to consumers and businesses may only accelerate on a modest pace.

Growth risks

Gross domestic product (GDP) growth remains tepid against a backdrop of uncertainty.

Facing economic headwinds, the question remains: What will the BSP do? Tempered GDP growth numbers and target-consistent inflation suggest that there’s scope to continue monetary easing.

Meanwhile global uncertainty, tagged as a reason for the BSP’s rate pause, is likely to persist come April – when the monetary board meets next to set policy rates.

Related article: Inflation Preview: Slowdown amid a foodfest

Will they decide based on inflation and economic growth indicators or will they wait out the pervasive global uncertainties?

We’ll have to wait a couple more weeks to see.

(Disclaimer: This is general investment information only and does not constitute an offer or guarantee, with all investment decisions made at your own risk. The bank takes no responsibility for any potential losses.)