BSP seen to bring down RRR to zero by 2028

Big banks’ reserve requirements are seen to be slashed further to zero in the near term, Security Bank said.

“Our forecast is that even in the next couple of years, there will still be cuts,” Security Bank Corp. Vice-President and Research Division Head Angelo B. Taningco said in mixed English and Filipino.

Mr. Taningco said they expect the central bank to reduce the reserve requirement ratio (RRR) by 200 basis points (bps) next year, 150 bps in 2027 and another 150 bps in 2028.

This would bring the current 5% reserve requirement for big banks to zero by 2028.

Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. earlier said the central bank is eyeing to bring down banks’ reserve requirements to zero before his term ends in 2029.

The BSP last week announced it will cut the RRR of universal and commercial banks and nonbank financial institutions with quasi-banking functions by 200 bps to 5% from 7%, effective March 28.

It will also reduce the RRR for digital banks by 150 bps to 2.5%, while the ratio for thrift lenders will be lowered by 100 bps to 0%.

Rural and cooperative banks’ RRR has been at zero since October, the last time the BSP cut reserve requirements.

From a high of 20% in 2018, the central bank has since brought down the RRR to single-digit levels.

Further lowering reserve requirements could lead to further financial intermediation and make the usage of capital more efficient, Mr. Taningco said.

“It would lead to more growth prospects because you have additional funds,” he added.

The RRR is the portion of reserves that banks must hold onto rather than lending out. When a bank is required to hold a lower reserve ratio, it has more funds to lend to borrowers.

Several economists estimated that the RRR cut will release PHP 300 billion to nearly PHP 400 billion of additional liquidity in the economy.

For this round, Security Bank estimated that PHP 325 billion will be injected into the financial system.

“This was part of the plan, gradual (reduction) every year until it reaches zero. The timing was just what we didn’t expect, it came a bit early.”

Mr. Taningco said there is a need to make sure the reductions are implemented at a gradual pace as the central bank is juggling inflation, growth and exchange rate stability.

“More liquidity is inflationary. So, it’s a balance. That’s why it’s gradual and not one time, big time. In theory, we could bring the 5% down to zero, but that would be inflationary.”

The central bank has said the risks to the inflation outlook have become “broadly balanced” for this year and the next.

It expects inflation to average 3.5% this year and 3.7% in 2026, both within the 2-4% target range.

“If we go from 5% to zero, how many billions is that? That’s already about a trillion. If it’s done all at once, the peso may weaken significantly. So, we are trying to avoid that excessive volatility,” Mr. Taningco added.

For the past months, the peso has been under pressure amid the dollar surge. The local unit fell to the record-low PHP 59-per-dollar level thrice last year, twice in November and once in December.

The RRR cut would also boost bank lending, Mr. Taningco said, though this may not necessarily be “substantive” growth.

The latest BSP data showed bank lending jumped by 12.2% year on year to PHP 13.1 trillion in December, its fastest growth in two years. — Luisa Maria Jacinta C. Jocson