In a statement, Bangko Sentral ng Pilipinas (BSP) said a special meeting of its monetary board had authorized Governor Benjamin Diokno to lower the reserve requirements by up to a maximum 400 basis points in 2020.
The board authorized Diokno to to determine the timing and extent of the reserve requirement reductions by taking into account the impact of the virus on liquidity in domestic markets, giving him flexibility to promptly address any strains in the market.
Following this decision, Diokno announced the 200 basis point cut as of March 30 to "calm markets and to encourage banks to continue lending to both retail and corporate sectors."
Potential cuts to reserve requirements for other institutions will be explored, the statement added.
Last year BSP lowered its reserve requirements 500 basis points to 14 percent, most recently in October, and Diokno has said he aims to lower the rate to a single digit by 2023.
BSP has been easing its monetary policy stance since May 2019 and has lowered its overnight reverse repurchase (RRP) rate rate 5 times since then by a total of 150 basis points to 3.25 percent.
The most recent cut took place on March 19 when BSP also temporarily relaxed its regulations for compliance reporting by banks, the calculation of penalties on required reserves and single borrower limits to mitigate the risk of financial sector volatility and ensure adequate liquidity and credit.
On March 19 BSP lowered its forecast for inflation in 2020 to 2.2 percent from February's 3.0 percent and the 2021 forecast to to 2.4 percent from 2.9 percent, due to the fall in oil prices, lower inflation in recent months and the adverse effects of the virus on global and domestic economic activity.
It also said the balance of risks to the inflation outlook now leans to the downside and uncertainty over the "potentially protracted pandemic poses significant downside risks to aggregate demand."
On March 23 Diokno was quoted as telling reporters that BSP will buy 300 billion pesos of debt from the Treasury under a 3-month repurchase agreement, renewable for another 3 months, with the government using the funds to contain the impact of the virus.
Bangko Sentral ng Pilipinas issued the following statement:
"In a special Monetary Board (MB) meeting yesterday, the MB authorized Bangko Sentral ng Pilipinas (BSP) Governor Benjamin E. Diokno to reduce the reserve requirement (RR) ratios of BSP-supervised financial institutions of up to a maximum of 400 bps for 2020.
To properly calibrate reduction in the RR, the MB likewise authorized the BSP Governor to determine the timing, extent, and coverage of the reduction in the RR, taking into consideration the impact of COVID-19 on domestic liquidity. The authority given to the Governor to adjust the RR allows the BSP flexibility to promptly address any possible liquidity strain in the industry.
Pursuant to this authority, BSP Governor Diokno announced today a 200 bps reduction in the RR ratio of reservable liabilities of universal and commercial banks (U/KBs) effective 30 March 2020. Potential cuts on the reserve requirements for other banks and non-bank financial institutions will also be explored. The BSP will issue guidelines on these operational adjustments.
The RR cut is intended to calm the markets and to encourage banks to continue lending to both retail and corporate sectors. This will ensure sufficient domestic liquidity in support of economic activity amidst this global pandemic due to the Coronavirus Disease (COVID-19).
For further reserve requirement reductions, Governor Diokno said, “The BSP will have to assess the impact of COVID-19 on the broader economy.” He added that the behavior of banks, particularly their capacity to absorb, invest, and lend the freed-up liquidity, will likewise be a determining factor for further adjustments."
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