By Luisa Maria Jacinta C. Jocson, Reporter
ADDITIONAL REDUCTIONS to banks’ reserve requirement ratio (RRR) ought to be progressive to prevent exacerbating inflation, analysts suggested.
“Lowering RRRs to minimal figures gradually is logical to align it with regional counterparts and enhance the competitiveness of the banking sector,” Nomura Global Markets Research analyst Euben Paracuelles stated in an e-mail. “RRR acts as a levy on financial intermediation.”
“However, I do not believe that drastic RRR reductions should be expedited. BSP’s gradual strategy is suitable as it permits a recalibration that aligns with existing economic conditions and the inflation forecast,” he added.
The Bangko Sentral ng Pilipinas (BSP) diminished the RRR for universal and commercial banks as well as nonbank financial institutions possessing quasi-banking functions by 250 basis points (bps) to 7% from 9.5%, effective last October.
It also reduced the RRR for digital banks by 200 bps to 4% and for thrift banks by 100 bps to 1%. Rural and cooperative banks’ RRR was also lowered by 100 bps to 0%.
“We must all recognize that every cut in the RR translates to inserting hundreds of billions of pesos into the system,” GlobalSource Partners country analyst Diwa C. Guinigundo, a former BSP deputy governor, stated in a Viber message.
The RRR signifies the fraction of reserves that banks must retain to ensure they can meet obligations in the event of unexpected withdrawals. When a bank is mandated to hold a reduced reserve ratio, it gains greater funds to allocate to borrowers.
From a peak of 20% in 2018, the central bank has since lowered reserve requirements to single-digit proportions.
“Overall, we are confident that the BSP is fully aware of both the liquidity and inflationary effects of excess liquidity in the system, which the BSP itself is constantly absorbing through its open market operations window,” Mr. Guinigundo remarked.
“While it is of lesser significance, there is always a cost related to managing liquidity and inflation,” he added.
BSP Governor Eli M. Remolona, Jr. has indicated that they aim to reduce large banks’ RRR to as low as zero before his term concludes in 2029.
He previously stated that the country’s reserve requirements remain among the highest in the region.
“The reduction in RR to nearly zero is specifically intended to create an equal playing field between banks subject to mandatory RR and nonbanks which are exempt,” Mr. Guinigundo expressed.
He mentioned the presumption is generally that banks are “forever liquid.”
“However, liquidity could pose a risk to banks especially when they are over-leveraged. Thus, RR serves as a regulatory assurance that in moments of liquidity crises, banks have a resource to draw liquidity from.”
“Effective oversight of banks could indeed render RR unnecessary, although this is not consistently the situation even in more advanced economies,” he continued.
Analysts indicated that further reductions to the RRR could also aid in reinforcing economic expansion.
“Another aspect of RR reduction is the potential objective of BSP to inject further liquidity into the system, enhance the credit transmission of monetary policy, and invigorate economic activities,” Mr. Guinigundo remarked.
“The BSP might be striving to facilitate economic growth now that inflation appears to be stabilizing recently.”
The Philippine economy increased by a less-than-expected 5.2% in the third quarter, down from the adjusted 6.4% growth in the second quarter and 6% a year prior.
This brought the average gross domestic product for nine months to 5.8%, slightly below the 6-6.5% full-year objective.
Meanwhile, the latest statistics from the local statistics bureau indicated inflation averaged 3.2% over the 11-month period, aligning with the BSP’s full-year inflation forecast and comfortably within the 2-4% target.
“The critical point is to direct these liquidity injections from RRR reductions towards bank lending for productivity-boosting investments such as infrastructure and agricultural modernization,” Mr. Paracuelles stated.
“This would enhance potential growth, alleviate supply-side constraints, and subsequently relieve inflation pressures,” he added.
Nomura in a recent report expressed that it predicts the central bank will implement a 200-bp reduction to major lenders’ RRR by mid-2025. This would adjust the ratio to 5%.
“From the perspective of the BSP, these reductions align with its longer-term aim of lowering the RRR to single-digit levels and assisting in further enhancing the transmission of its policy rate cuts by improving liquidity conditions,” it noted.
Nomura highlighted the “swifter and more comprehensive” transmission of the BSP’s tools and policies amidst its structural reforms.
“The availability of these instruments has enabled the BSP to resume RRR reductions… with an estimated liquidity injection exceeding 1% of GDP, coinciding with the BSP’s rate reductions, thereby enhancing transmission further.”
In a separate report, the International Monetary Fund (IMF) indicated that the reduction in RRR would result in a “welcomed decrease in financial intermediation expenses and better align reserve requirements with regional counterparts.”
“Alterations in the reserve requirement ratio must be incorporated into the overarching monetary policy stance and synchronized with any modifications in the size of the BSP balance sheet,” it added.
