Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona Jr. said they could reduce banks’ reserve requirement ratio (RRR) to a low of five percent from its current 9.5 percent but the timing is crucial and not when the central bank is still on a hawkish stance.
“We can reduce it to five percent. Right now it’s 9.5 percent. That’s still one of the highest in the region,” Remolona told Bloomberg TV in an interview Friday, May 17.
He reiterated that “timing is important” and that they “don’t want to do it while we’re still hawkish.”
“My sense is it won’t be on the same meeting (monetary policy meeting) but we would like to reduce the reserve requirement by quite a bit because I think it’s distorting financial intermediation,” said Remolona.
Last August 2023, in a briefing with business editors, the BSP chief already indicated that cutting the RRR to five percent is on the table.
At the time, Remolona said the BSP will eventually reduce the RRR to five percent within the course of his six-year term as governor or until 2029. He even noted that the ideal RRR is actually a zero rate.
In June of last year, 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 basis points (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 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.
Since 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.
In Asia, the Philippines’ RRR is considered one of the highest. Big banks’ RRR was at its peak at 20 percent in 2014, and at the time, it was the highest in the region.
An RRR cut is not considered a change in monetary policy stance but is merely an operational adjustment on the part of the BSP.
Basically, changes in RRR have a significant effect on money supply in the banking system.