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Philippines Slashes Reserve Requirement After Rate Cut

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The Philippine central bank on Thursday announced a phased reduction in the amount of cash that big banks should hold as reserves, just a week after it cut the key interest rate for the first time in over two years, to boost liquidity amid weaker growth.

The Monetary Board of the Bangko Sentral ng Pilippinas, or BSP, decided in a non-policy session to trim the reserve requirement ratio for universal and commercial banks in three moves from the current 18 percent, among the highest in the world.

The first reduction will be a 100 basis point cut effective May 31. The second, which is a half-point reduction, will take effect on June 28. The third cut, again a 50 basis point reduction, will take effect on July 26.

In total, the RRR will fall to 16 percent and is expected to release around 200 billion pesos into the economy.

The move did not come as a surprise as BSP Governor Benjamin Diokno signaled after the interest rate cut last week that the bank will consider a reduction in the RRR shortly.

On Thursday, Diokno said the RRR for smaller banks will be reviewed in the next policy session on June 20.

Liquidity conditions remain tight as indicated by the single-digit M3 growth for seven months and high time deposit rates.

"The gradual reduction in RRR will definitely help alleviate the current tight liquidity conditions and complements its recent policy rate cut," ING economist Nicholas Mapa said.

"Growth will likely fall within the government's 6-7 percent target while inflation remains benign, all the while continuing BSP's reform agenda," the economist added.

On May 9, the central bank unexpectedly cut its key interest rate, after official data showed that the economic growth was the weakest in four years in the first quarter of this year.

The overnight reverse repurchase facility rate was slashed by 25 basis points to 4.5 percent. In 2018, the bank had raised the rate by 175 basis points in five instances.

The latest reduction of the key rate was the first since 2016, when it was lowered following some operational changes.

The Philippine economy grew just 5.6 percent in the first quarter, which was the weakest pace since 2015.

The bank forecast inflation to settle within the target range of 3.0 percent ± 1.0 percentage point for both 2019 and 2020.

The BSP aims to bring the RRR within single digits by 2023. Diokno's predecessor Nestor Espenilla Jr., who passed away earlier this year, had cut the RRR by 200 basis points in 2018.

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