The Monetary Board, the policy-making body of the Bangko Sentral ng Pilipinas, said Thursday it approved a one-percentage-point cut in the reserve requirement ratio of banks from 20 percent to 19 percent.
Bangko Sentral managing director for monetary policy Francisco Dakila Jr. said about P80 billion would be freed up to the domestic financial system because of the RRR reduction. The reserve requirement is a central bank regulation that sets the minimum amount of reserves that must be left untouched by a bank.
The Bangko Sentral said in a statement the RRR reduction would support the shift toward a more market-based implementation of monetary policy and its broad financial market reform agenda.
“The reduction will apply to the reservable liabilities of all banks and non-bank financial institutions with quasi-banking functions with reserve requirement currently at 20 percent,” it said.
“In deciding to reduce the reserve requirement ratios, the Monetary Board reaffirms the BSP’s commitment to gradually lessen its reliance on reserve requirements for managing liquidity in the financial system,” the Bangko Sentral said said.
The board, in a resolution on Feb. 8, approved the 100-basis-point reduction in RR of universal/commercial banks and non-bank financial institutions with quasi-banking functions.
The Monetary Board said the BSP attained sufficient progress in its shift towards the use of market-based monetary instruments since the adoption of the interest rate corridor framework in June 2016.
“Even as the BSP continues to refine its instruments and operations under the IRC, the Monetary Board observed that the BSP now has ample scope to mitigate the potential liquidity impact of a phased reduction in the reserve requirement via offsetting auction-based monetary operations,” it said.
The Monetary Board said the reduction in reserve requirements would help mobilize liquidity in support of economic activity and capital market development over the medium term.
The reduction in the reserve requirement ratios will take effect on March 2, 2018.
The 20-percent reserve requirement, set in May 2014, was the highest in the region.
Bangko Sentral Governor Nestor Espenilla Jr. earlier announced the plan to gradually reduce the 20-percent reserve requirement ratio to a single-digit level. He said there was a need to inject more liquidity into the financial system to satisfy the needs of the national economy.