After rate cut, Philippine central bank slashes RRR to boost liquidity

FILE PHOTO: A logo of Bangko Sentral ng Pilipinas (Central Bank of the Philippines) is seen at their main building in Manila, Philippines March 23, 2016. REUTERS/Romeo Ranoco

By Karen Lema

MANILA (Reuters) – The Philippine central bank announced on Thursday it will cut the amount of cash that banks must hold as reserves in three steps to help boost liquidity as economic growth slows.

Bangko Sentral ng Pilipinas (BSP), which cut its key interest rate last week on expectations inflation will ease, will lower the reserve requirement ratio (RRR) for banks by two percentage points to 16% from May to July.

The first 100 basis point cut in RRR will take effect on May 31, another 50 basis point cut on June 28 and last 50 basis point cut on July 26, BSP Governor Benjamin Diokno said in a text message.

The announcement did not come as a surprise as some economists had anticipated RRR cuts were forthcoming given the tight liquidity conditions in the market.

“The central bank believed it was time to give the economy a much needed breather especially with the inflation objective well in hand,” said Nicholas Mapa, economist at ING Bank in Manila. “BSP looked to finally address the lack of funds circulating in the system.”

Money supply grew at its slowest in more than a decade in March, rising 4.2 percent from 7.1 percent the previous month.

The RRR cuts are expected to free up around 190 billion pesos ($3.62 billion) of additional liquidity into the financial system, the central bank said.

The move would also help restore some of the liquidity soaked up by the central bank’s rate hikes last year. To rein in red-hot inflation, it raised rates by a total 175 basis points.

The peso closed 0.6% weaker at 52.59 per dollar, its lowest in two weeks.

Last week, the BSP cut its benchmark interest rate by 25 basis points to 4.50%, on cooling inflation expectations and after the economy grew at its slowest pace in four years in the first quarter.

Inflation is expected to average 2.9% this year and 3.1% next year, the central bank had said, well inside its 2-4 percent target for both years.

The amount of cash that banks must hold as reserves was cut twice last year in line with a medium-term plan to bring the ratio to a single digit and help bolster the country’s economic growth rate, which is slowing.

Diokno has said the reserve requirement ratio will be in the single digits before his term ends in 2023.

(Additional reporting by Neil Jerome Morales; Editing by Jacqueline Wong)

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