The Bangko Sentral ng Pilipinas (BSP) is keen on cutting the reserve requirement ratio (RRR) next year, as the “old-school tool” could lead to a distortion of financial intermediation.
At the EagleWatch economic briefing on Thursday, BSP Governor Eli M. Remolona Jr. said the present RRR is currently at 9.5 percent and was still high by the region’s standards.
“The reason we have such a high reserve requirement is when we were still very old school, it was a way to control money supply [but] nobody does that anymore. Right now it’s just a distortion in financial intermediation, it drives a wedge between lending rates and deposit rates unnecessarily,” Remolona explained.
Remolona said “when the time is right” the BSP will cut the RRR further. This may happen in 2024 given that the BSP is keeping a hawkish stance and is expected to raise rates in November.
“For 2023, its [RRR cut] off the table. Maybe the soonest will be 2024,” Remolona told reporters on the sidelines of the briefing.
The last time the BSP cut the RRR was in June 2023, when it slashed it by as much as 250 basis points, bringing down the effective ratios across banks to a single digit, as it seeks to ensure “stable” domestic liquidity and credit conditions. This was 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 reduced the RRR of universal and commercial banks by 250 basis points to 9.5 percent.
Last week, BSP said it intends to raise interest rates anew in its next meeting and maintain this rate until the end of the first semester of next year.
The BSP maintained its Target Reverse Repurchase (RRP) Rate at 6.25 percent. Accordingly, the interest rates on the overnight deposit and lending facilities were retained at 5.75 percent and 6.75 percent, respectively.
When asked whether the BSP is considering to hike rates in November, Remolona said “Well, honestly, yes.”
The Monetary Board decided to maintain key policy rates for now, but raised its inflation outlook for this year and next year. Only the inflation expectation for 2025 was kept at 3.4 percent.
Average inflation is now seen to reach 5.8 percent in 2023 from 5.6 percent previously, while the forecast for 2024 likewise rose to 3.5 percent from 3.3 percent.
Image credits: Michael Edwards | Dreamstime.com
