Cuts in bank reserves unlikely soon – BSP

The Bangko Sentral ng Pilipinas (BSP) is unlikely to cut banks’ reserve requirement ratio (RRR) in the third quarter, amid expectations of policy rate cuts in the second half of the year.

“We want to eventually reduce the reserve requirement, but we’re trying to figure out the right timing. We will raise it at the Monetary Board meeting at some point soon,” BSP Governor Eli Remolona Jr. said.

Monetary authorities are still determining when and how much would be reduced in banks’ reserve requirement levels.

“But it’s unlikely by the third quarter,” he added.

The RRR is the portion of reserves that banks must set aside in deposits with the BSP rather than lending out.

The BSP has brought down the RRR for big banks to a single-digit level in 2023 from a high of 20 percent in 2018.

In June last year, the regulator slashed the ratio for big banks and non-bank financial institutions with quasibanking functions by 250 basis points to 9.5 percent.

The RRR for digital banks was lowered by 200 basis points to six percent from eight percent, followed by mid-sized or thrift banks by 100 basis points to two percent from three percent.

The level of deposits that small or rural and cooperative banks are required to keep with the BSP was also lowered by 100 basis points to one percent from two percent.

However, Remolona earlier said that the 9.5 percent RRR for big banks is still not low enough compared to the country’s neighboring peers.

The RRR cuts in June coincided with the expiration of the central bank’s pandemic relief measure, which allowed banks to count their lending to small businesses as part of their compliance with the reserve requirement for deposit liabilities and substitutes.

Michael Ricafort, chief economist at Rizal Commercial Banking Corp., said the BSP could cut banks’ RRR this year or next year, amid favorable economic and monetary conditions.

“Reserve requirements cuts, if already allowed by well anchored inflation and would not lead to higher inflation at some point in the future, would increase banks’ loanable funds,” Ricafort said.

It would also help reduce intermediation costs with lower cost of reserve requirements, which could help stimulate more demand for loans, increase investments and other business activities.

“Every one-percentagepoint cut in large banks’ RRR is equivalent to about P142 billion infused into the banking system that can be used for more loans, investments, expansion, among other uses of funds,” he added.

Last week, the Monetary Board extended its policy pause for a fourth straight meeting, keeping the key interest rate at a 17-year high of 6.50 percent.

The BSP has raised borrowing costs by 450 basis points from May 2022 to October 2023 to tame inflation and stabilize the peso.