BSP cuts banks’ reserve requirements starting June 30

Some P325B expected to be released to the financial system

The Bangko Sentral ng Pilipinas (BSP) will reduce the amount of cash that banks must have in reserve starting June 30, a move that is expected to release some P325 billion into the financial system.

The reserve requirement ratio (RRR) will be cut by 250 basis points (bps) for universal and commercial banks (U/KBs) and nonbank financial institutions with quasi-banking functions (NBQBs); 200 bps for digital banks and by 100 bps for thrift banks, rural banks and cooperative banks.

This will bring the RRRs of U/KBs and NBQBs to 9.5 percent, digital banks to 6 percent, thrift banks to 2 percent and rural and cooperative banks to 1 percent.

These numbers refer to the amount of cash, as a fraction of their customers’ deposits, that banks must keep on hand to make sure that they are able to meet their liabilities in case of sudden withdrawals.

In a statement, the BSP said the reduction in the RRR is intended to help ensure stable domestic liquidity and credit conditions.

Also, the reduction in the RRR was timed to coincide with the expiration of alternative modes of compliance with reserve requirements by endJune 2023, such as extending loans to micro, small and medium-sized enterprises.

“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,” the central bank said.

According to Rizal Commercial Banking Corp., the reduction in the RRR would mean more pesos that could be used for lending activities such as subscribing to government securities and and other fixed income investments, equities or stocks, foreign currency and other economic activities.

An example is the inaugural offering, scheduled also on June 30, of the 56-day BSP Bill that serves as an additional instrument for absorbing system liquidity.

“The BSP emphasizes that the lower reserve requirements do not constitute any shift in the BSP’s monetary policy settings,” the regulator said, adding that it will continue to signal its monetary policy stance through the key policy interest rate that is currently pegged at 6.25 percent.

When the Monetary Board announced in May that there was no change in the policy rate after a series of increases, analysts were divided on whether this pause will be followed by a decrease in benchmark interest rate.

The economic research team at the Bank of the Philippine Islands (BPI) said that a policy rate cut was “unnecessary at this point,” considering the possibility of another rate hike by the United States Federal Reserve and also because the Philippine economy remained strong and did not need additional stimulus.

BPI added that instead of a BSP rate cut, cutting the RRR for banks may be more appropriate.