BSP announces 'surprise' 200 basis point cut to RRR

The Bangko Sentral ng Pilipinas (BSP) [link], our central bank, announced a 200 basis point cut to the reserve requirement ratio (RRR), effective March 28. The BSP said that the move was in line with its “long-term goal of enabling banks to channel their funds more effectively toward productive loans and investments”, adding that an RRR reduction will “lessen frictions that hinder financial intermediation.” The move is estimated to release between P300 billion and P400 billion of liquidity into the financial system. 

  MB BOTTOM-LINE:  There’s a ton of nuance here and it’s easy to get caught in the weeds. I’m not an economist, so while it logically makes sense that RRR cuts should worsen asset price inflation, I don’t know for certain that that’s what is happening, and all the times I’ve talked about that in the past, I’ve received pushback from actual economists saying that the benefits to the economy outweigh whatever impact on asset prices any RRR cut might have. What I do know, however, is that RRR cuts are a massive gift to the banking sector. Such a juicy gift that, under a previous BSP administration, the then BSP Governor Felipe Medalla said that the BSP would “literally bribe the banks” with RRR cuts to waive fees on small bank-to-bank financial transactions that unfairly penalize the poor. He said that in 2023, when the RRR was 12%. Now, with this cut, the RRR will be just 5%, and what do we have to show for it? Predictably, our banks are generating record profits across the board. But hey, at least the elimination of small value transfer fees was totally worth it! Wait. What’s that? The BSP didn’t actually require banks to waive small value transfer fees? Is it still even a bribe if you give away something of public value and get nothing in return?