BSP seen to cut banks’ reserve requirements soon

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is expected to cut the amount of deposit banks are required to keep in their vault before the year ends after the central bank started lowering interest interest rates, according to Metropolitan Bank & Trust Co. (Metrobank).

Metrobank chief economist Nicholas Mapa said that BSP Governor Eli Remolona Jr. may cut banks’ reserve requirements ratio (RRR) soon.

“The current reserve requirement is 9.5 percent. We think Remolona might lower it by 250 basis points or 2.5 percentage points before the end of the year, with the first reduction likely to happen soon,” Mapa said.

Earlier in May, Remolona said the Monetary Board is planning to cut big banks’ RRR by 450 basis points to five percent from the existing 9.5 percent, which is currently the highest in the region.

The RRR is the percentage of bank deposits and deposit substitute liabilities that banks cannot lend out and must set aside in deposits with the BSP.

According to Mapa, adjustments to banks’ reserve requirement levels were once considered a monetary policy adjustment. But with BSP’s new interest rate corridor system and its accompanying liquidity management facilities, RRR cuts are now seen as a simple operational adjustment.

“Since reserve requirement changes are not considered policy moves, we believe the upcoming reserve requirement reduction could happen on any Thursday (when the Monetary Board meets weekly),” Mapa said.

He said that the RRR cuts could happen shortly after the Fed policy meeting this week or after the release of September inflation data, which could show Philippine inflation dropping to around 2.3 percent.

“However, it remains to be seen whether reducing the reserve requirement at a time when policy rates remain at elevated levels will translate to increased bank lending and a significant boost to the economy,” Mapa said.

Banks that have more funds available for lending could deposit this money back with the BSP, where they can earn an attractive interest rates of about 6.25 percent, he said.

“As such, should the BSP carry out a 150-basis-point RRR reduction in the near term, banks may become attractive again in the near term. However, caution about its impact on bank lending and overall growth momentum is warranted,” he said.

The central bank has already brought down the RRR for big banks to a single-digit level last year from a high of 20 percent in 2018.

In June 2023, the BSP slashed the RRR for universal and commercial banks as well as non-bank financial institutions with quasi-banking functions by 250 basis points to 9.5 percent from 12 percent previously.

Likewise, the RRR for digital banks was reduced 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 of small or rural and cooperative banks that are required to keep with the BSP was also lowered by 100 basis points to one percent from two percent.