By Luisa Maria Jacinta C. Jocson, A reporter
ADDITIONAL DEPENDENCE on the banking reserve requirement ratio (RRR) should be gradually to avoid inflation, say analysts.
“Reducing RRRs to lower levels over time makes sense to align them with regional peers and make the banking system more competitive,” Nomura Global Markets Research analyst Euben Paracuelles said in an email. “RRR is a tax on financial arbitrage.”
“But I don’t think the big RRR cuts should be rushed. The BSP’s gradual approach is appropriate as it allows for restructuring in line with prevailing economic conditions and inflationary outlook,” he added.
The Bangko Sentral ng Pilipinas (BSP) lowered the RRR for international and commercial banks and non-bank financial institutions with banking-like activities by 250 basis points (bps) to 7% from 9.5%, effective last October.
It also reduced RRR for digital banks by 200 bps to 4% and for retail lenders by 100 bps to 1%. RRR for rural and cooperative banks reduced by 100 bps to 0%.
“We all need to realize that every RR reduction means injecting hundreds of billions of pesos into the system,” GlobalSource Partners country analyst Diwa C. Guinigundo, former BSP vice governor, said in a Viber message.
RRR is the percentage of reserves that banks must hold to ensure that they can meet their debts in the event of sudden withdrawals. If a bank is required to hold a lower reserve ratio, it has more money to lend to borrowers.
From a peak of 20% in 2018, the central bank has since reduced reserve requirements to single-digit levels.
“All in all, we are sure that the BSP is more than aware of both the liquidity shortfall and the inflation of the excess liquidity in the system that the BSP itself regularly enters through its open market operations window,” said Mr. Guinigundo.
“Although it is very important, there are always costs of financial management and inflation,” he added.
BSP Governor Eli M. Remolona, Jr. he said they are looking to reduce the central bank’s RRR to as low as zero before his term ends in 2029.
Earlier he said the country’s security needs are still among the highest in the region.
“The reduction of RR to almost zero is really intended to level the playing field between banks that are subject to mandatory RR and nonbanks that are not,” said Mr. Guinigundo.
He said the common assumption is that banks are “always liquid.”
“But lack of money can be dangerous for banks, especially if it is extended. So, RR is really a regulatory guarantee that when a financial crisis hits the system, banks have somewhere to go to get money.”
“Effective supervision of banks can make RR unnecessary, although this is not always possible even in the most advanced economies,” he added.
Analysts say further cuts in the RRR would also help boost economic growth.
“The other side of the RR reduction is the possible intention of the BSP to continue to inject money into the system, strengthen the credit transfer of monetary policy and stimulate economic activities,” said Mr. Guinigundo.
“The BSP may be aiming to help stimulate economic growth as inflation appears to be on the upswing recently.
The Philippine economy grew a weaker-than-expected 5.2% in the third quarter, down from a revised 6.4% growth in the second quarter and 6% last year.
This pushed the nine-month average gross domestic product to 5.8%, slightly below the full-year target of 6-6.5%.
Meanwhile, the latest data from the local statistics agency showed inflation averaging 3.2% over the 11-month period, which is in line with the BSP’s full-year inflation forecast and within the 2-4% target.
“The key is to move these injections of liquidity from the reduction of RRR on bank lending to investments that improve productivity such as infrastructure and agricultural development,” said Mr. Paracuelles.
“That would increase potential growth but also reduce supply-side constraints and reduce inflationary pressure,” he added.
Nomura in a recent report said it expects the central bank to deliver a 200-bp cut to the lenders’ RRR by mid-2025. This will bring the average to 5%.
“From the BSP’s point of view, this reduction is in line with its long-term goal of lowering the RRR to a single-digit level and helping to further enhance the transmission of its policy rate cuts at that time by raising credit conditions,” he said.
Nomura commented on the “swift and comprehensiveness” of the BSP’s instruments and policies during its structural reforms.
“The availability of these instruments allowed the BSP to resume RRR cuts… with a cash injection of around 1% of GDP and accompanied by a rate cut by the BSP, thereby helping to carry forward.”
In a separate report, the International Monetary Fund (IMF) said a reduction in the RRR would leads to “an acceptable decrease in fifinancial coordination costs and better alignment of reserve requirements with regional peers.”
“Changes in the reserve requirement ratio need to be included in the context of the overall monetary policy and combined with any changes in the size of the BSP’s balance sheet,” it added.
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