The financial system is well positioned to absorb more than P300 billion in additional liquidity from the reduction of banks’ reserve requirement ratio (RRR) when it takes effect next month.
The Bangko Sentral ng Pilipinas (BSP) announced on Friday it has reduced the RRR by 200 basis points (bps) to 5 percent from 7 percent for universal and commercial banks effective from March 28.
The central bank also cut the RRR for digital banks by 150 bps to 2.5 percent, and by 100 bps to zero for thrift banks.
Currently, rural banks and cooperatives have zero reserve requirement ratio.
“The financial system is well positioned to absorb the additional liquidity in an orderly manner, thanks to the central bank’s other tools for managing excess liquidity,” Jun Neri, BPI lead economist, said in an email message late Friday.
The BSP made the announcement after both the equities and peso-dollar markets had closed on Friday.
The RRR move came a week after the policymaking Monetary Board decided to keep key rates steady “amid global uncertainty.”
Every 1 percentage point drop in the RRR releases an estimated P130 billion to P150 billion into the financial system – money that could be used for lending, or investing in government securities, equities and foreign exchange markets.
The RRR are funds that banks hold in reserve to ensure that they can meet sudden cash withdrawals. The reserve requirement also serves as a tool for central banks to manage money supply by increasing or reducing the ratio to influence interest rates.
With the lower RRR, banks will gain an extra leeway to increase their loans portfolios as well as investments in bonds and other fixed income securities, equities, foreign exchange, and other assets investments, Michael Ricafort, RCBC chief economist, said in an email to reporters late Friday.
“So the move is favorable for these investments in terms of greater demand than otherwise,” said Ricafort, who estimated the additional funds will reach P330 billion.
“Instead of being idle as required reserves, the money would be deployed by these banks to more productive investment outlets that generate earnings,” Ricafort added.
BPI’s Neri considers this development “timely, as the BSP’s recent decision to keep its policy rate steady is likely to mitigate any inflationary impact.”
Banks have also gained valuable experience in managing liquidity from recent RRR reductions, ensuring smooth implementation of this policy change.
“The RRR cut is anticipated to boost lending, providing banks with greater flexibility in allocating resources. Recent data indicate that previous RRR cuts in June 2023 and October 2024 have already contributed to improved credit access, with loan growth accelerating from around 7 percent in mid-2023 to 12.2 percent in December 2024,” Neri said.
“With the RRR cut, borrowers outside the property sector are likely to gain easier access to funds. Furthermore, the RRR cut levels the playing field between local and foreign banks,” he added.
Foreign banks, which primarily fund their Philippine operations through deposits sourced from their headquarters abroad, will now face a more equitable competitive environment, the BPI economist said.
Aris Dacanay, HSBC‘s Asean economist, said in a report on Saturday, the central bank move reflects the long-standing goal of the BSP ever since it started cutting the RRR from 20 percent in 2017.
“The BSP pushed through with what it said it would do – cut the RRR soon to 5.0 percent,” Dacanay said.
However, the BSP’s main goal, as the central bank governor previously said, is to bring the reserve requirement ratio to zero percent by the end of his term in 2029.
HSBC does not think this latest reduction in the RRR “will serve as a substantial short-term boost to growth,” even though it may support the economy, albeit marginally.
“This is because the liquidity injected will likely be reabsorbed by the BSP’s monetary tools like BSP securities, repo facilities, etc,” Dacanay said.
HSBC estimates the latest cut in the reserve requirement will inject an additional P382 billion into the financial system.
When the BSP cut the RRR last October, HSBC estimated P450 billion in additional liquidity from the big banks alone.
On October 28, 2024, after the cut, the BSP matched the injected liquidity by absorbing P521 billion more than the previous week.
The lower the RRR, the stronger the monetary policy transmissions will be, Dacanay said.
“The BSP’s incoming easing cycle is likely to be faster and more effective in boosting growth as there is more to lend at lower interest rates,” he added.
“Reducing RRRS will lessen frictions that hinder financial intermediation,” BSP Gov. Eli M. Remolona said late Friday.
The country’s RRR is still higher compared with other members of the Association of Southeast Asian Nations (Asean), according to Hong Kong-based think-tank CEIC Data.
Thailand has the lowest at 1 percent, while Singapore and Malaysia both have 2 percent. Vietnam has 3 percent, followed by Myanmar at 3.75 percent, Brunei with 6 percent, Cambodia with 7 percent, Laos with 8 percent and Indonesia with 9 percent, currently the highest ratio among Asean member countries.
Outside Asean, Hong Kong does not require any cash reserves for banks, while Japan has 0.8 percent. The Philippines’ RRR is now equal to Taiwan’s, while China and South Korea have higher reserve requirements at 6.6 percent and 7 percent, respectively.
