By means of Luisa Maria Jacinta C. Jocson, Reporter
MORE THAN P300 billion could be released into the Philippine economy after the central bank cut the reserve requirement ratio (RRR), analysts said.
“We estimate that the impact of the 250 basis points (bp) reduction in RRR will be a liquidity injection of approximately P310-330 billion (approximately 1.2% of gross domestic product for the full year 2024), which is relatively substantial ,” says Nomura Global. Markets Research said in a commentary.
The Bangko Sentral ng Pilipinas (BSP) said on Friday it would lower the RRR for big banks and non-banks. Ffinancial institutions with quasi-banking functions by 250 basis points to 7%, from 9.5%, effactive on October 25.
It will also reduce the ratio for digital banks by 200 basis points to 4%; savings banks by 100 basis points to 1%; and rural and cooperative banks by 100 basis points to 0%.
Michael L. Ricafort, chief economist of Rizal Commercial Banking Corp., said that for every one percentage point (ppt) reduction in the RRR, at least P150 billion would be injected into the economy. Ffinancial system.
The cut of 250 basis points or 2.5 percentage points for large banks and non-banks could lead to a release of at least 375 billion euros by large banks, he said. Taking all banks into account, a total of 400 billion euros could be injected into the economy Ffinancial system.
The RRR is the part of reserves that banks must hold instead of lending. When a bank has to maintain a lower reserve ratio, it has more money to lend to borrowers.
Nomura said it expects the BSP to further cut the RRR next year.
“In our view, BSP’s target is to reach 5% by 2025, so we would expect more RRR cuts next year, due to our expectation that headlines inFThis remains within BSP’s objective.”
BSP Governor Eli M. Remolona Jr. previously said they aim to reduce the RRR to just 5% as the country’s reserve requirements are among the highest in the region.
“We also saw no urgency for the adjustment based on limited signs of liquidity tightening,” Nomura said. “We believe that this move is merely a return by BSP to its long-term commitment to reduce RRR to low single-digit levels, which it previously targeted by 2023 but was postponed due to the rise in capital market rates.Frisks.”
The central bank has since cut the RRR for universal and commercial banks to a single-digit level, from a high of 20% in 2018.
In its statement, the BSP said the reduction in RRR is in line with efforts to “reduce disruptions in the financial system.”
“The reductions will reduce agency costs and promote better pricing Ffinancial services,” it added.
Mr Ricafort said the lower reserve requirement would boost loan demand.
“Moreover, more pesos could be invested in the Ffinancial markets such as bonds and others Ffixed income investments, equities, foreign exchange, real estate, among others that would help support capital gains than otherwise,” he added.
RISKS
Meanwhile, Enrico P. Villanueva, associate professor at the Department of Economics of the University of the Philippines Los Baños, said the reduction in RRR “has serious implications for Ffinancial stability.”
“Although the reduction in reserve requirements reduces intermediation costs, reserves remain a monetary instrument for those with liquidity risksaging and financial stability.”
Mr Villanueva said that while there is room to further reduce reserve requirements for large banks, this may not be the case for smaller banks.
“The very low RR for thrift, rural and cooperative banks is alarming given that most bank failures in the Philippines occur in this sector. These RR levels may require reassessment from a Ffinancial stability perspective,” he said.
With the BSP’s recent reduction in reserve requirements, rural and cooperative banks essentially no longer have to maintain reserve requirements as their ratios have been reduced to 0%.
“In the Philippines Ffinancial system from which episodes of bank failures largely arise savings banks and rural banks, what will help stabilize that vulnerable sector if their reserve ratio is between 0 and 1%?” he added.
Mr. Villanueva also noted that the reduction in RRR would not immediately translate into savings for consumers.
“A reduction in the required reserve ratio will certainly reduce the banks’ funding costs. However, there is no automatic and full transfer of interest cost savings to borrowers,” he said.
“The extent to which savings are channeled to borrowers will depend on the level of competition between banks, the elasticity of loan demand and the business leverage of borrowers. Institutional clients are likely to benefit most from this; high-risk private customers probably the least.”
The RRR cut will have a “dampened” impact on bank lending in the short term, Mr Villanueva said. He added that loan demand and credit conditions would “significantly improve” in the long term amid greater certainty about the country’s economic prospects.
“The sooner the calibrated interest rate cuts are completed, the more certainty and risks there areFidentity to do investment and loan planning,” he added.
“If the reduction in the reserve ratio ultimately causes loanable funds to far exceed loan demand from creditworthy borrowers, banks may be tempted to relax credit standards and indulge in too much subprime lending… Banks may be encouraged to investing in higher risk assets, such as lower rated companies. funds,” said Mr. Villanueva.
He said the BSP must be vigilant in “cleaning up excess liquidity and preventing excessive risk-taking and asset bubbles.”
Meanwhile, Filomeno S. Sta. Ana III, coordinator of Action for Economic Reforms, said the reduction in the RRR will not necessarily lead to more investment, despite expectations of higher loan demand.
“The caveat is that this positive development in itself will not guarantee that businessmen will invest in the Philippine economy,” he said via Facebook Messenger.
“The government must address the prevailing policy uncertainty arising from other bad policies that have been curtailed, for example fiscal space, intensiFpolitical conFlict and abetgeopolitical tensions,” he added.
Leonardo A. Lanzona Jr., professor of economics at Ateneo de Manila University, said this could attract short-term rather than long-term investments.”
“In other words, this can only boost aggregate demand but leave aggregate supply behind constant, resulting in inflation,” he said in an email.
For his part, Mr. Villanueva said the reduction in RRR has an impact on the economyFwill probably be minimal.
“While a reduction in required reserves will initially put more money in circulation, this could ultimately end in more loans, higher bank placements with BSP, or more bond positions. The BSP can clean up operations if there is excess money supply.”
“The RRR reduction may have been implementedFlationary in the unlikely (but possible) event that banks can channel the extra money into high-profile consumer loans or speculative real estate loans.”
Nomura said the RRR reduction reFtalks about the “greater deception” of the central bankFidence” when relaxingFlat.
“With inflation remaining on a downward path, BSP has room to further remove the restrictiveness of its monetary policy,” the report said.
Nomura expects the BSP to cut by a further 25 basis points each at the remaining Monetary Board meetings this year, on October 17 and December 19. It also expects 75 basis points of cuts early next year, bringing the policy interest rate to 5% in May 2025. .
“The Fed’s rate cuts should also support further BSP rate cuts in our view, but we see these RRR cuts as supporting our view that the BSP is sticking to a measured approach, i.e. 25bp rate cuts, despite the fact that the Fed has implemented an excessive 50 bp interest rate cut. basis points this week, partly because some of the easing is already happening through the reduction in reserve requirements,” it added.