The central bank is not inclined to reduce banks’ reserve requirement ratios (RRR) this year amid a hawkish monetary policy stance while inflation average is above-the-target.
Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said they will start RRR cuts when its policy-making arm, the Monetary Board, has also started easing its policy rate, which he already said is not happening anytime soon.
“We will reduce (RRR) for the system as a whole but not yet soon since we’re still hawkish. That will be a contradictory move,” he said in a mixture of English and Filipino.
The banking system’s RRR for the big banks is currently at 9.5 percent, the highest in the region, said Remolona.
Last August 2023, the BSP chief was interviewed as saying he agreed with some assessment that the ideal RRR is as low as five percent.
“We’re still doing the math (of how much to cut),” he said more recently.
When asked if there is a possibility that they could reduce the reserves ratio this year, he said they would have to cut the policy rate first before deciding on the RRR.
“Once we start to ease the policy rate, we can reduce the RRR,” he said in Filipino.
Reducing the RRR effectively lowers the costs to banks for maintaining reserves, and at the same time, increasing funds for lending.
Last year, Remolona said that “eventually” the RRR will be reduced to five percent, during the course of his six-year term as BSP’s seventh governor. Back then, he said the ideal rate is zero.
In Asia, the Philippines’ RRR is considered one of the highest if not the highest. Big banks’ RRR was at its peak at 20 percent in 2014.
Among Southeast Asian countries, compared to Philippines’ 9.5 percent RRR, Vietnam implements three percent; Malaysia, two percent; and Thailand, one percent. Outside of ASEAN, China has an RRR of 10.75 percent.
Remolona has often communicated to the market that timing is crucial of when to cut the RRR and not while the BSP still has a tightening bias.
Reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP. These funds cannot be used for lending. Reservable liabilities include demand, savings, time deposit and deposit substitutes.
An RRR cut is not considered a change in monetary policy stance but is merely an operational adjustment on the part of the BSP.
Last June 2023, the BSP reduced both banks and non-banks’ RRR to single-digit levels to unleash fresh funds into the financial system of as much as P360 billion.
The RRR of the big banks and non-bank financial institutions was reduced by 250 bps; digital banks by 200 bps; and 100 bps for thrift banks, rural and cooperative banks.
All universal and commercial banks’ RRR as well as non-banks with quasi-banking functions is now at 9.5 percent from 12 percent, while digital banks’ RRR is at six percent from eight percent. Thrift banks’ RRR was cut to two percent from three percent, while rural and cooperative banks have an RRR of one percent.
The new ratios will apply to the local currency deposits and deposit substitute liabilities of banks and non-banks, said the BSP.
Basically, changes in RRR have a significant effect on money supply in the banking system.
The last time the BSP reduced the RRR for big banks was March 2020, when Covid-19 was first declared a global pandemic. By August of the same year, the BSP also reduced the RRR of thrift and rural banks by 100 bps.
As of end-2023, the country's inflation averaged at six percent, way above the two percent to four percent target. To manage high inflation, the BSP has raised the policy rate by a cumulative 450 basis points to 6.5 percent by Oct. 26, 2023.