THE Bangko Sentral ng Pilipinas (BSP) on Thursday slashed the reserve requirement ratios (RRR) of banks by as much as 250 basis points, bringing down the effective ratios across banks to single digit, as it seeks to ensure “stable” domestic liquidity and credit conditions.
This is the first RRR reduction made by the BSP since 2020, when it cut the ratio by 200 basis points to the present 12 percent.
The BSP cut the RRR of universal and commercial banks by 250 basis points to 9.5 percent.
Meanwhile, the RRR of non-bank financial institutions with quasibanking functions (NBQBs) and thrift banks, rural banks and cooperative banks were reduced by 200 bps and 100 bps, respectively.
The RRRs of NBQBs and thrift banks will now be at 9.5 percent and 6 percent, respectively. The RRR for rural and cooperative banks is now down to just 1 percent.
The reduction in RRRs shall take effect on the reserve week beginning June 30 and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs.
“The reduction in reserve ratios is intended to coincide with the expiration of alternative modes of compliance with reserve requirements by end-June 2023 and thereby ensure stable domestic liquidity and credit conditions,” the BSP said in a statement on Thursday.
“This operational adjustment is in line with the BSP’s ongoing efforts towards a more active and flexible approach to liquidity management through market-based monetary operations,” the BSP added.
The BSP noted that the implementation of the reduced RRR will coincide with its inaugural offering of a 56-day BSP bill, which will serve as an “additional instrument for absorbing system liquidity.”
Nonetheless, the BSP emphasized that the lowering of the reserve requirements “do not constitute any shift in the BSP’s monetary policy settings” as it reiterated that its priority remains managing the country’s inflation.
“The BSP continues to prioritize bringing inflation back towards a target-consistent path over the medium term and will continue to signal its monetary policy stance through the key policy interest rate, or the rate on the overnight reverse repurchase facility,” it said.
BSP Governor Felipe M. Medalla earlier signaled that the central bank could slash the RRR before the end of the first half should the inflation print cool down. (Related story: https://businessmirror.com.ph/2023/01/13/bsp-cut-in-rrr-before-end-june-very-likely/)
The country’s inflation in May slowed to a four-month low of 6.1 percent from 6.6 percent in April.
Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said the cut in large banks’ reserve requirements would “infuse” about P325 billion into the financial system.
Ricafort noted that with the BSP’s latest action, it “fulfilled” its earlier “promise/target” of bringing down the large banks’ RRR to single-digit levels “to better align” with other Asian countries, particularly neighboring Southeast Asian countries.
“The RRR cut meant to neutralize also the de facto tightening with the expiration of some regulatory relief measures particularly those that allowed some loans, especially new MSME loans, to be counted for the computation of banks’ reserve requirements since the pandemic started,” he said.
Earlier this year, Medalla disclosed that the Association of the Philippines (BAP) was receptive to bringing down transaction costs in lieu of lowering the RRR. (Related story: https://businessmirror.com.ph/2023/02/28/bap-open-to-scuttling-costs-for-small-transactions/)
Image credits: Patrick Roque via Wikimedia Commons CC BY-SA 4.0
