BSP’s RRR cut plans clouded by inflation pressures

Further cuts to banks’ reserve requirements remain an option for the Bangko Sentral ng Pilipinas (BSP), but its ongoing campaign to raise interest rates to tame inflation means the move is not an immediate priority, Nomura Global Markets Research said.

In a report following discussions with central bank officials across Southeast Asia, Nomura said it came away with the impression that the BSP still intends to further lower the reserve requirement ratio (RRR) to improve the transmission of monetary policy.

Reserve requirements are portions of funds that banks must keep as standby cash and cannot use for lending or investing. They help ensure banks have enough buffer to meet obligations to both depositors and investors in case of sudden withdrawals, while also serving as a tool for managing money supply in the financial system.

When Eli Remolona Jr. took office as BSP governor in 2023, the RRR for large banks stood at 9.5 percent. The central bank has since cut the ratio to 5 percent, with the latest reduction in 2025 freeing up funds for banks to lend or invest.

Remolona has previously signaled that the ratio should fall further, even raising the possibility of bringing it down to zero during his term. But Nomura said maintaining the credibility of the BSP’s inflation-targeting framework remains a priority amid persistent price pressures.

“So, while RRR cuts is still a goal for BSP, such moves, from BSP’s perspective, must be consistent with the broader easing stance, and hence we think there is no urgency to act at this point,” Nomura said.

The BSP’s benchmark interest rate stands at 5 percent after a cumulative 75-basis-point increase since April. The central bank has tightened monetary policy as the war in the Middle East pushed up global oil prices, putting pressure on net energy importers such as the Philippines and weighing on their currencies.

Inflation surged to a three-year high of 7.2 percent in September, far exceeding market expectations, as elevated oil prices compounded food supply disruptions caused by heavy monsoon rains. Economic growth, meanwhile, slowed to 2.6 percent in the first half of the year, complicating the central bank’s efforts to rein in prices without further weakening activity.

The BSP’s next rate-setting meeting is scheduled for Oct. 22. Nomura expects policymakers to raise the benchmark rate by another quarter of a percentage point to curb rising consumer prices.

The bank also warned of the possibility of further rate increases beyond October, citing upside risks to inflation from El Niño, a potential recovery in government spending and the risk that higher prices could feed into broader price and wage pressures.

“The tone should remain hawkish, in our view, with BSP continuing to pledge vigilance and remain focused on containing these risks and anchoring inflation expectations,” Nomura said.