MANILA, Philippines (UPDATED) – The Bangko Sentral ng Pilipinas (BSP) will trim the reserve requirement ratio (RRR) by 200 basis points to 16%, Governor Benjamin Diokno said on Thursday, May 16.

The cut will be implemented in 3 tranches. The first cut of 100 basis points will be implemented by May 31, followed by a 50-basis-point cut on June 28 and also on July 26.

“This new policy will apply to universal and commercial banks only. For the other types of banks, the cut in RRR will be considered in the next Monetary Board meeting,” Diokno said.

The move comes after the BSP cut interest rates by 25 basis points, amid inflation and economic growth slowing down.

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

Mapa said the RRR cut comes at the perfect time, with inflation easing within target and expected to settle within 2% to 4% until 2020.

“BSP looked to finally address the lack of funds circulating in the system. Deploying the appropriate tool to address specific ailments was key in this round of decisions despite being tempted to deploy one tool to address all concerns,” Mapa said.

The RRR is the amount banks need to hold on to in their reserves.

Trimming the RRR by 200 basis points is said to free up some P200 billion in domestic liquidity. This means that banks have more money to lend to consumers, which then encourages spending in the economy.

The Philippines has one of the highest RRR in the world at 18%. Diokno previously said he wants this to be brought down to a single digit.

The Bankers’ Association of the Philippines (BAP) lauded the central bank’s latest move, as it would sustain the country’s growth trajectory.

“The 2% cut in reserve requirements recognizes the BSP’s effectiveness in strengthening the country’s banking system. It is a bold move, coming on the heels of a policy rate cut, but equally appropriate given how our financial system has advanced under the BSP’s stewardship,” said BAP president Cezar Consing. – Rappler.com