The Bangko Sentral ng Pilipinas on Thursday reduced the reserve requirement ratio of universal and commercial banks by 250 basis points to free up more funds.
It also brought down the RRR of non-bank financial institutions with quasi-banking functions by 250 bps, of digital banks by 200 bps and of thrift banks, rural banks and cooperative banks by 100 bps.
RRR refers to the minimum reserves required for depository institutions. A change in the minimum reserve ratio affects the deposit base a financial institution can lend out.
The BSP said the reduction would bring the RRRs of universal and commercial banks and NBQBs from 12 percent to 9.5 percent; those of digital banks from 8 percent to 6 percent; thrift banks from 3 percent to 2 percent; and rural and cooperative banks from 2 percent to 1 percent.
The new ratios will take effect on the reserve week beginning June 30, 2023 and will 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.
“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. This includes the inaugural offering on June 30, 2023 of the 56-day BSP Bill, which serves as an additional instrument for absorbing system liquidity,” it said.
The BSP clarified that the lower reserve requirements do not constitute any shift in monetary policy settings. “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.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said the latest RRR cut would infuse about P325 billion into the financial system, or about P130 billion for every 1-percentage-point reduction for large banks.
Ricafort said “more peso supply will be infused into the market; more peso could be used for lending activities; purchases of government securities/other fixed income investments, equities/stocks, forex, property, other investments/assets, other spending/consumption, other business/economic activities, among others.”
He said this could be siphoned off with the upcoming 56-day BSP bills starting June 30, 2023 to help stabilize the exchange rate and overall inflation.
“The RRR cut is also fulfilling the promise/target a few months/years ago to bring down the large banks’ RRR to single digit levels by the end of the BSP Governor’s term on June 30, 2023,” Ricafort said.
The 56-day BSP bills, an additional tenor under the BSP securities facility, will be offered alongside the 28-day BSP bills.
BSP Governor Felipe Medalla earlier said the timing of the RRR cut was important especially if monetary authorities were not pressured anymore to increase the policy rates to tame inflationary pressures.
The BSP opted to maintain the key interest rates steady in the last meeting due to the slowdown in inflation in the past months. Economists expect the BSP to keep the rates steady in its meeting this month amid the continued deceleration in inflation.
Citi Philippines said key interest rates were expected to remain untouched this month on continued slowdown in inflation rate.
“We maintain our expectation that the policy rate would remain unchanged at 6.25 percent at the June 22 meeting, given a steady downward trend in inflation,” Citi economist for the Philippines Nalin Chutchotitham said.