The reserve requirement ratio (RRR) for large banks could be reduced by up to two percentage points (ppts) next year, bringing it closer to three percent as inflation stabilizes, economic growth slows, and the Bangko Sentral ng Pilipinas (BSP) remains inclined toward monetary easing.

Such a move would bring the RRR for universal and commercial banks to around three to four percent by the end of 2026, down from the current five percent, Singapore-based United Overseas Bank Ltd. (UOB) said in its latest Quarterly Global Outlook for the first quarter of 2026, published last week.

BSP Governor Eli M. Remolona Jr. said last week that while the central bank intends to further lower the RRR, the timing is not yet appropriate given that the financial system still holds “too much” liquidity. “We’re at five percent now, which is already pretty good. I think I would be happy to go down to two percent in the next year or so,” Remolona said.

The BSP has implemented a series of RRR cuts through early this year to release more funds into the financial system. The ratio for universal and commercial banks was cut by 200 basis points (bps) to five percent from seven percent in February. The RRR for digital banks was reduced by 150 bps to 2.5 percent from four percent, while that for thrift banks was lowered by 100 bps to zero.

Meanwhile, UOB substantially lowered its Philippine gross domestic product (GDP) growth forecast for this year to 4.6 percent from 5.3 percent previously, citing the disappointing four-percent expansion in the third quarter and the “potential for a prolonged drag from governance concerns surrounding infrastructure investment and adverse weather conditions.”

The Singaporean bank also downgraded its growth projection for next year to five percent from 5.7 percent, expecting the economy to operate under “still-challenging” conditions.

Economic growth sharply slowed to four percent in the third quarter, a development that has been linked to the fallout from an alleged flood-control corruption scandal involving government officials.

For UOB, expectations of subdued price pressures, improved government spending, and “a more accommodative monetary policy setting” suggest the Philippines is on a path toward recovery despite its growth forecasts falling short of the government’s targets of 5.5 to 6.5 percent for 2025 and six to seven percent for 2026.

Inflation clocked in at 1.5 percent in November, marking the slowest price increase in four months and the ninth consecutive month below the BSP’s two- to four-percent target band.

UOB expects inflation to accelerate to a still within-target 2.5 percent in 2026 from the projected 1.5-percent average for 2025. The bank attributed the surge to “statistical base effects, potential electricity rate adjustments, possible increases in tariffs on rice imports, and weather-related supply shocks.”

Stable global energy prices and soft domestic demand are expected to offset this spike, UOB said.

To date, the BSP has cut its key borrowing rate by a cumulative two ppts to 4.5 percent from 6.5 percent in August 2024, when the inflation-targeting monetary policy easing cycle began. The most recent rate cut was delivered last week as the local economy grapples with a gloomier outlook due to the prolonged impact of governance issues.

UOB views the central bank’s monetary easing as a major headwind for the Philippine peso, alongside “fiscal credibility concerns and deteriorating economic fundamentals.”

The bank expects the peso to underperform its regional peers and remain under pressure from domestic factors, despite an anticipated weakening of the United States (US) dollar.

“Political uncertainties and tariff headwinds have weighed on investment sentiment, consumer confidence, and exports,” UOB noted.

“Additionally, narrowing interest rate differentials—given the BSP’s potential acceleration of interest rate cuts versus modest US Fed [Federal Reserve] easing may lessen the yield advantage of the Philippine peso,” it said.

UOB forecasts the peso to trade at the ₱58 level against the greenback in the first half of 2026 before strengthening to the ₱57:$1 level in the second half. The peso slid to record lows this year amid governance concerns.

The bank noted that as of early December, the peso depreciated by 0.6 percent quarter-on-quarter, adding that “year-to-date, the currency has weakened by 1.2 percent from ₱57.98 at end-2024, making it the third-worst currency performer in Asia after the Indonesian rupiah and Indian rupee.”