After keeping its key policy rate unchanged in last week’s meeting amid global uncertainty, the policymaking Monetary Board of the Bangko Sentral ng Pilipinas (BSP) may lower the reserve requirement ratio (RRR) for banks soon as its next policy move to release liquidity and support economic growth, bank economists and analysts said.
The Monetary Board will meet in April to decide on the rate cuts, although the move could come earlier, one analyst said.
Another analyst sees two possibilities: one, a 2-percentage-point cut in the banks’ RRR “could happen anytime soon,” although “a 25-basis point reduction” in the BSP’s key rates is also possible.
For every 1 percentage reduction in the RRR, about P130 billion is released into the country’s financial system– money that could be used for lending, and investing in government securities, equities, and foreign exchange markets.
RRRs are funds that banks hold in reserve to ensure that they can meet sudden cash withdrawals. RRRs also serve as a central bank tool for managing the money supply by increasing or reducing it to influence interest rates.
Michael Ricafort, RCBC chief economist, said a cut in the banks’ RRR “could happen anytime soon and is the biggest market lead for now.”
“A 25-basis point (bps) cut in the central bank’s policy rate is on the table for April 2025, but keeping the policy rate unchanged is also possible,” Ricafort said in a Viber message. He explained that “A cut in the RRR is a more neutral cut than policy rate reduction.”
The RRRs of universal and commercial banks and non-bank financial institutions with quasi-banking functions (NBQBs) were reduced in October 2024 by 250 basis points to 7 percent from 9.5 percent.
The required reserves for digital banks were also slashed by 200 basis points to 4 percent from 6 percent.
Thrift banks’ RRR now stands at 1 percent while rural banks and cooperative banks’ RRR is currently, at 0.0 percent.
Ricafort said an RRR cut should be policy neutral since RRRs “are being phased out as the main liquidity management tool.”
In 2016, the Monetary Board shifted to the interest rate corridor and used the term deposit facility (TDF) auction every Wednesday and the BSP securities auction every Friday as the new liquidity management tools.
“So, any RRR cut with additional peso liquidity released into the banking system are now being mopped up using the BSP TDF and BSP securities auctions as the main liquidity management tools. Thus, a cut would be the neutral policy from a peso liquidity management perspective,” Ricafort said.
HSBC’s economist for Asean Aris Dacanay sees an RRR cut more likely soon. “We now expect the BSP to lead with a 200-basis point RRR cut in the early second quarter of this year, bringing the RRR to 5.00 percent,” Dacanay said in a report.
“Amid the uncertainties in global trade, resuming the easing cycle with a more ‘neutral’ form of monetary easing will be strategic. Lowering the RRR may boost the supply of credit in the market and, thus, bring forth much-needed support to growth. And based on our previous research, an RRR cut that successfully supports cyclical growth could lend support to the peso,” Dacanay said.
Meanwhile, Citi’s economist for the Philippines Nalin Chutchotitham, in a report said a cut in RRR “would help support economic activity, while having limited impact on the exchange rate vs. the policy rate.”
“We also think that the RRR cut last year has likely provided additional loosening effect on financial conditions, supporting credit growth and overall domestic demand at the margin,” Chutchotitham said.
He said the use of RRR is “more of a technical adjustment to reduce structural distortion in the financial system, and not a substitute for policy rate, which is a cyclical policy tool.”
BSP Governor Eli Remolona said during the last monetary policy meeting that uncertainty hovering over inflation and the economic growth outlook dictates keeping the status quo in the current monetary policy settings.
Remolona said the monetary authorities are “still in the easing cycle” and that they are “not thinking of raising rates.”
Ricafort said, “Remolona also signaled a possible cut in large banks’ RRR from 7 percent to 5 percent as early as before April 3, 2025, the next BSP rate-setting meeting that is still considered higher compared to other Asian countries.”
He added that the 2-percentage point cut will release “about P330 billion” into the financial system and could also lead to lower long-term peso valuation yields.
“The BSP is still in the easing cycle and may reduce the key rate by a total of 50bps in 2025. It could again keep key rates unchanged at the next policy meeting,” Ricafort said.
“Local monetary officials [have taken] a cautious stance before further rate cuts, pending any potential inflationary impact from higher US import tariffs, going forward,” Ricafort said.
