By means of Luisa Maria Jacinta C. Jocson, Reporter
There should be further reductions in banks’ reserve requirements (RRR). gradually so as not to fuel inflation, analysts said.
“Reducing RRRs to minimum levels over time makes sense to bring them on par with regional peers and make the banking system more competitive,” Nomura Global Markets Research analyst Euben Paracuelles said in an e-mail mail. “RRR is a tax on financial intermediation.”
“But I don’t think substantial cuts in reserve requirements should be rushed into effect. BSP’s gradual approach is appropriate as it allows for a recalibration consistent with prevailing economic conditions and inflation prospects,” he added.
The Bangko Sentral ng Pilipinas (BSP) cut the RRR for universal and commercial banks and non-bank financial institutions with quasi-banking functions by 250 basis points (bps) from 9.5% to 7% last October.
It also cut the RRR for digital banks by 200 basis points to 4% and for thrift lenders by 100 basis points to 1%. The RRR of rural and cooperative banks was also reduced by 100 basis points to 0%.
“We must all realize that any reduction in the RR means injecting hundreds of billions of pesos into the system,” GlobalSource Partners country analyst Diwa C. Guinigundo, a former BSP deputy governor, said in a Viber message.
The RRR is the portion of reserves that banks must maintain to ensure they can meet their obligations in the event of sudden withdrawals. When a bank has to maintain a lower reserve ratio, it has more money to lend to borrowers.
From a high of 20% in 2018, the central bank has since cut reserve requirements to single-digit levels.
“On balance, we are confident that the BSP is more than aware of both the liquidity and inflation implications of excess liquidity in the system, which the BSP itself regularly clears through its open market operations,” said the Mr. Guinigundo.
“While secondary, there are always costs associated with liquidity and inflation management,” he added.
BSP Governor Eli M. Remolona Jr. has said they aim to reduce the RRR of major banks to zero before his term ends in 2029.
He previously said the country’s reserve needs remain among the highest in the region.
“The reduction of the RR to almost zero is actually intended to establish a level playing field between banks that are subject to mandatory RR and non-banks that are not,” said Mr Guinigundo.
He said the assumption is normally that banks are “always and forever liquid.”
“But liquidity can be a risk for banks, especially if they are overloaded. So RR is really a guarantee from the regulator that when a liquidity crisis hits the system, banks have somewhere to go to extract liquidity.”
“Effective banking supervision could indeed make RR redundant, although this is not always the case even in more developed economies,” he added.
Analysts said further cuts to the RRR could also help support economic growth.
“The other side of the RR reduction is BSP’s possible aim to further inject liquidity into the system, strengthen monetary policy credit transmission and stimulate economic activities,” Mr Guinigundo said.
“The BSP could focus on promoting economic growth as inflation seems to be on good behavior lately.”
The Philippine economy grew a weaker-than-expected 5.2% in the third quarter, a slowdown from revised growth of 6.4% in the second quarter and 6% a year ago.
This brought the nine-month average of gross domestic product to 5.8%, slightly below the full-year target of 6-6.5%.
Meanwhile, the latest data from the local statistics bureau shows that inflation averaged 3.2% over an eleven-month period, in line with the BSP’s inflation forecast for the full year and well within the 2-4% target.
“The key is to channel these liquidity injections, from reserve requirement cuts, to bank loans for productivity-enhancing investments such as infrastructure modernization and agriculture,” Mr Paracuelles said.
“That would boost potential growth, but also ease supply-side constraints, thus easing inflationary pressures,” he added.
Nomura said in a recent report that it expects the central bank to cut major lenders’ reserve requirements by 200 basis points by mid-2025. This would bring the ratio to 5%.
“From BSP’s perspective, these cuts are in line with its long-term objective of reducing the RRR to single-digit levels and further helping to improve the transmission of its policy rate cuts at that time by improving liquidity conditions,” the BSP said.
Nomura noted the “faster and more complete” transfer of the BSP’s instruments and policies during the structural reforms.
“The availability of these instruments has enabled BSP to resume RRR cuts… with an estimated liquidity injection of more than 1% of GDP and coinciding with BSP’s interest rate cuts, further facilitating transmission.”
In a separate report, the International Monetary Fund (IMF) said the reduction in reserve requirements would achieve this lead to a “welcome decline in fifinancial intermediation costs and better coordination of reserve requirements with regional colleagues.”
“Changes in the reserve requirement ratio should be factored into the overall monetary policy stance and coordinated with any changes in the size of the BSP balance sheet,” it added.