RRR cut to give BSP space to defer next easing
The fresh cut to the cash requirements of banks next month could give the Bangko Sentral ng Pilipinas (BSP) enough space to delay its next rate cut and match the slow pace of monetary policy easing in the United States, analysts said.
This is because unlike a policy rate reduction, the liquidity injection from the upcoming reduction in banks’ reserve requirement ratio (RRR) could spur economic growth without having to worry about risks of peso depreciation, economists at Chinabank Research said in a commentary.
“The move should provide further support to the Philippine economy—which has experienced some slowdown in the second half of 2024—especially in light of the BSP’s decision to keep its policy rate unchanged last week,” Chinabank said.
“Furthermore, this may give room for the BSP to delay its policy rate cuts as it keeps pace with a slower pace of monetary easing by the US Federal Reserve,” it added.
Starting March 28, the RRR for big banks will be reduced by 200 basis points to 5 percent.
At the same time, the RRR for digital banks will be trimmed by 150 bps to 2.5 percent. The reserve requirement for thrift banks will be removed following a 100-bp cut to their RRR.
Inflationary?
The RRR refers to the certain amount of deposits that banks must set aside as standby funds, which do not generate returns because they cannot be used for lending activities. This is to ensure that lenders are able to meet their liabilities in case of sudden withdrawals.
By easing such a requirement, banks now have more available funds to lend, which can create easier financial conditions for an economy that grew below the Marcos administration’s target last year. Analysts estimated that the new round of RRR reduction could free up at least P300 billion in additional loanable funds.
Including the previous triple-R cut of the same magnitude last October, BSP Governor Eli Remolona Jr. was able to complete his plan to trim bank reserves to 5 percent less than two years into his term. The RRR was at 9.5 percent when he assumed office back in June 2023.
As it is, the decision to further relax the reserve requirements of banks came a week after the powerful Monetary Board (MB) had left the policy rate unchanged at 5.75 percent.
But the BSP chief had said the central bank was still on easing mode, adding that the MB would resume cutting interest rates once the uncertainties from global trade developments clear.
Jun Neri, lead economist at Bank of the Philippine Islands, said the RRR cut was “timely” as the rate pause can mitigate any inflationary impact from the liquidity boost.
“The BSP’s recent decision to keep its policy rate steady will likely mitigate any inflationary impact,” Neri said in a separate commentary.
“The financial system is well-positioned to absorb the additional liquidity in an orderly manner, thanks to the central bank’s other tools for managing excess liquidity,” he added.
