Banks’ reserve requirements have been cut in a bid to free up cash that could be used to fuel the economy, the Bangko Sentral ng Pilipinas (BSP) announced on Thursday.
The Monetary Board, it said in a statement, had approved a one-percentage point “operational adjustment to support the BSP’s shift toward a more market-based implementation of monetary policy as well as its broad financial market reform agenda.”
Effective March 2, 2018, the reduction will apply to all banks and non-bank financial institutions with quasi-banking functions that are currently required to comply with a 20-percent reserve requirement ratio (RRR).
“In deciding to reduce the reserve requirement ratios, the Monetary Board reaffirms the BSP’s commitment to gradually lessen its reliance on reserve requirements for managing liquidity in the financial system,” the central bank said.
“The Monetary Board believes that the BSP has attained sufficient progress in its shift towards the use of market-based monetary instruments since the adoption of the interest rate corridor (IRC) framework in June 2016,” it added.
The RRR is the proportion of current deposits that banks need to keep with the central bank against the sum they can loan out to borrowers.
“Even as the BSP continues to refine its instruments and operations under the IRC, the Monetary Board observed that the BSP now has ample scope to mitigate the potential liquidity impact of a phased reduction in the reserve requirement via offsetting auction-based monetary operations,” the central bank said.
“At the same time, the Monetary Board noted that the reduction in reserve requirements will help mobilize liquidity in support of economic activity as well as capital market development over the medium term.”
Central bank managing director Francisco Dakila Jr. told reporters that the reduction in RRR “will free about P90 billion” in liquidity.
The move puts into motion Bangko Sentral Governor Nestor Espenilla Jr.’s plan to cut the RRR to single-digits, citing the need to inject more liquidity into the financial system.
Banking industry players have expressed support, saying that lower reserve requirements would boost their businesses.