MANILA, Philippines — There is no let-up in monetary stimulus from the Bangko Sentral ng Pilipinas (BSP).
A day after announcing a P300-billion cash injection to the government through bond purchases, the central bank said on Tuesday it is slashing bank reserves for big banks by 200 basis points to 12 percent effective March 30, releasing an additional P200 billion to the financial system.
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The half a trillion-peso monetary bazooka over the past two days is an unprecedented move from BSP, targeted at offsetting the economic repercussions of the coronavirus disease-2019 (COVID-19) and the Luzon lockdown that jolted the financial markets and put business to a halt.
Without economic rescue, the National Economic and Development Authority projects the Philippine economy to contract by as much as 0.6% in 2020 due to the lingering impact of COVID-19.
BSP Governor Benjamin Diokno carried out the decision for his colleagues at the seven-member policymaking Monetary Board, which gave him authority “to promptly address any possible liquidity strain in the industry.”
The authority grants Diokno a “maximum” leeway of 400 bps cut on reserves for the entire 2020, leaving the dovish governor with a balance of 200 bps— or another P200 billion— in his ammunition ready to be deployed if the need arises.
“The BSP will have to assess the impact of COVID-19 on the broader economy,” Diokno said in a statement.
“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,” he added.
Funds need to be mobilized
On top of the back-to-back announcement of bond purchases and reserve cuts, BSP also deployed a deep 50 bps cut on its policy rate last Thursday, which brought key rates to their lowest level in two years.
All BSP’s policy easing, from lowering rates and reserves to purchasing bonds, are targeted at ensuring cash remains adequate in the economy while the nation pushes forward with putting the virus spread under control.
In particular, the cut on bank reserves would make more cash from universal and commercial lenders available for lending to consumers and investors. A key rate cut, in turn, should lower interest on loans and encourage more borrowing.
The bond-buying program, meanwhile, is unconventional and mimics tools deployed by central banks in the US and the UK, meant to give the government firepower to fund social and economic projects. It is also more temporary than rate and reserve cuts, and would last only for six months when bonds mature after which the government must pay back BSP with interest.
BSP’s response against COVID-19 has been noticeably bolder than that of the government, which apart from the P27.1-billion economic package announced last March 13, has yet to convince investors it is ready to fund a massive economic bounce-back.
“We need to see these easing measures translate to meaningful and well-coordinated mobilization of fiscal resources,” said Emilio Neri Jr., lead economist at Bank of the Philippine Islands, when sought for comment on BSP’s latest decision.
“Otherwise, the easing measure will be less effective and not reach the targeted sectors,” he explained.