The Philippine economy needs a boost after a lackadaisical performance in the first two quarters of 2019. It requires stimuli, along with pump-priming from the national government.
Economic Planning Secretary Ernesto Pernia also knew that the Bangko Sentral ng Pilipinas had to step into the picture and come up with a response to jolt the economy out of its stupor.
Pernia had confidence that BSP Governor Benjamin Diokno would push the right button . “I’m sure the BSP will do something…. Diokno knows it by now. He is a pro-growth central bank governor… I’m quite optimistic he will do the right thing,” Pernia said in early August after the government officially released the GDP figures for the second quarter.
The economy grew 5.5 percent in the second quarter, the slowest in four years, as the El Niño dry spell, delayed approval of the government budget, and the ban on construction activities during the midterm elections tempered household demand and government spending.
Economic growth in the first half averaged 5.6 percent, below the low end of the government’s target range of 6 percent to 7 percent set for the entire year.
The Monetary Board, as if on cue, immediately reduced the reserve requirement ratio of universal and commercial banks by 200 basis points in three stages within two months to 16 percent from 18 percent to bring more liquidity into the financial market.
The RRR cut was expected to release additional liquidity of about P230 billion into the financial system based on the P11.576-trillion deposits held by universal and commercial banks as of end-2018 as reported by Philippine Insurance Deposit Corp.
The Bankers Association of the Philippines welcomed the RRR, saying it would help boost the economy.
“The 2% cut in reserve requirements recognizes the BSP’s effectiveness in strengthening the country’s banking system. 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 BAP president Cezar Consing.
The BAP expressed optimism that the RRR reduction, together with the easing of policy rates, would sustain the growing economic momentum.
Diokno announced the RRR cut a week after the board reduced the overnight borrowing rate by 25 bps to 4.5 percent.
Reserve requirement, also called cash reserve ratio, is a central bank regulation that requires commercial banks to hold a minimum fraction of customer deposits and notes as reserves which they cannot lend out.
The reserve requirement ratio in the Philippines at 18 percent is one of the highest in the region.
Nicholas Mapa, a senior economist of ING Bank Manila, said with inflation gliding back to within target and expected to remain benign well into 2020, this was the perfect opportunity for the BSP to cut both the policy rate and reduce RRR as the gross domestic product grew at a four-year low of 5.6 percent in the first quarter.
Inflation eased to a 16-month low of 3 percent in April 2019 from 3.3 percent in March on more stable prices of food and other commodities. This brought inflation in the first four months to an average of 3.6 percent, within the government target range.
“The gradual reduction in RRR will definitely help alleviate the current tight liquidity conditions and complements its recent policy rate cut,” Mapa said.
“After slamming hard on the proverbial brakes in the third quarter of 2018 by jacking up rates by 175 bps, the central bank believed it was time to give the economy a much-needed breather especially with the inflation objective well in hand,” he said.
The BSP is not done with its accommodative policy. Diokno said the central bank was inclined to reduce the benchmark borrowing rate by another 25 basis points to 4 percent before the end of the year as the inflation rate is expected to ease further.
“We will [continue to] review the pertinent economic data and other developments,” Diokno said during the midyear economic forum organized by the Economic Journalists Association of the Philippines at the Ayuntamiento de Manila.
Diokno said giving a hint of another 25-bps cut in policy rate could allow the banking sector more time to prepare on what to do with extra liquidity. He did not say if the policy rate cut would be made ahead of the planned reserve requirement ratio reduction.
“Anything can happen between now and late September [which is the next policy meeting]. Reserve requirement cut remains a live issue,” Diokno said.
The Monetary Board, the policy-making body of the BSP, on Aug. 6 slashed the overnight borrowing rate by 25 basis points to 4.25 percent, taking into account the downward trajectory of the inflation rate and the sluggish economic growth in the first half.
Diokno said the latest baseline forecasts of the BSP indicated that inflation would likely settle within the target range of 2 percent to 4 percent for 2019 up to 2021.
ING Bank Manila senior economist Nicholas Mapa said he was expecting the BSP to cut the policy rates again by 25 bps in its September meeting given the previous comments from Diokno pointing to a total of 50 bps worth of rate cuts before the end of the year.
“Furthermore, we expect the BSP to reduce reserve requirements further in the fourth quarter after it completes its 2019 rate cut cycle to help infuse fresh liquidity into the market. RRR reductions will be put on hold as BSP gauges whether additional funds are diverted to productive activities and not simply parked at BSP’s overnight facilities,” Mapa said in a report.