Deposit reserve requirement ratio cut
The BSP announced today a staggered reduction in the reserve requirement ratio (RRR) on bank deposits as follows: 1ppt effective on May 31, 0.5ppt on June 28, and 0.5 effective July 26. These will bring the RRR for commercial banks, currently at 18%, to 16% by the end of July. A 1ppt cut is estimated to free up P90-100 billion of domestic liquidity. The cut is widely expected and was preceded yesterday by an increase in the volume of deposits offered under the term deposit facility (TDF). The additional P10-billion worth of 28-day deposits was oversubscribed and the BSP has announced that it will continue to offer the same higher volume next week.By separating the RRR cut from its policy interest rate cut last week, we think the BSP is taking pains to distinguish RRR as a structural reform (to lower the tax on financial intermediation) rather than monetary policy tool. We expect it to continue to try and neutralize the impact on liquidity through the TDF but whether or not it can in fact neutralize 100% depends on banks’ liquidity preferences ahead.