By Luisa Maria Jacinta C. Jocson, Reporter
FURTHER lowering banks’ reserve requirements is seen to drive economic growth as increased liquidity could boost bank lending, analysts said.
“This is good. It will certainly help prop economic activity further,” Ruben Carlo O. Asuncion, chief economist at Union Bank of the Philippines, Inc., said in a Viber message.
“This can further loosen existing financial conditions, help support more credit activity and consequently further drive domestic demand,” he added.
The Bangko Sentral ng Pilipinas (BSP) on Friday announced it will reduce the reserve requirement ratio (RRR) of universal and commercial banks and nonbank financial institutions with quasi-banking functions by 200 basis points (bps) to 5% from 7%, effective on March 28.
It will also cut the RRR for digital banks by 150 bps to 2.5%, while the ratio for thrift lenders will be reduced by 100 bps to 0%.
Rural and cooperative banks’ RRR has been 0% since October.
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.
“The BSP reiterates its long-run goal of enabling banks to channel their funds more effectively toward productive loans and investments. Reducing RRRs will lessen frictions that hinder financial intermediation,” the central bank said.
The RRR cut is expected to release fresh liquidity into the financial system, analysts said.
“It is a welcome development as it will help increase liquidity in specific parts of the economy as opposed to a policy cut which has a wholescale impact,” Patrick M. Ella, economist at Sun Life Investment Management and Trust Corp., said.
Analysts said there could be P300 billion to nearly P400 billion of liquidity released into the economy following the RRR cut.
“This move is expected to inject at least P300 billion worth of liquidity into the financial system, with the potential for further expansion through bank lending,” Bank of the Philippine Islands Lead Economist Emilio S. Neri, Jr. said.
Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort expects P320 billion to P330 billion to be infused into the banking system.
Chinabank Research said it estimated the RRR cut will free up around P364 billion of liquidity.
“The move should provide further support to the Philippine economy — which has experienced some slowdown in the second half of 2024 — especially in light of the BSP’s decision to keep its policy rate unchanged last week,” it added.
Meanwhile, HSBC economist for ASEAN Aris D. Dacanay said P382 billion of liquidity could be injected into the financial system.
“The BSP’s RRR cut aligns with the BSP’s long-term goal of bringing reserve requirements closer to regional norms while maintaining liquidity conditions that support economic growth,” John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, said.
“This reduction releases additional funds that banks can lend, potentially lowering borrowing costs and stimulating credit growth. This could boost private consumption, business expansion, and investment, supporting overall economic activity.”
Mr. Neri said the lower reserve requirements are seen to boost bank lending as it will provide banks with “greater flexibility in allocating resources.”
“Recent data indicate that previous RRR cuts in June 2023 and October 2024 have already contributed to improved credit access, with loan growth accelerating from around 7% in mid-2023 to 12.2% in December 2024,” he said.
“Still, a number of banks may have been constrained by a real estate demand slump caused by remote work and the Philippine offshore gaming operator ban. With the RRR cut, borrowers outside the property sector are likely to gain easier access to funds,” Mr. Neri added.
Separate BSP data showed outstanding loans of universal and commercial banks jumped by 12.2% year on year to P13.1 trillion in December. This was the fastest pace of bank lending growth in two years.
“In the longer term, the RRR cut, which lowers banks’ funding costs, would reduce loan rates as well,” Chinabank Research said.
“This could spur borrowing by businesses for business expansion and capital expenditure — which would be positive for the economy’s growth prospects,” it added.
The total resources of the Philippine financial system rose by 7.8% to nearly P34 trillion in 2024, earlier central bank data showed.
Mr. Ricafort said banks have the option to increase their loans, investments in bonds, fixed-income securities, equities, forex, and other assets.
“Instead of being idle as required reserves, at least the P320 billion to P330 billion would be deployed to more productive investment outlets that generate earnings,” he added.
Mr. Neri said the cut will also “level the playing field” between local and foreign banks.
“Foreign banks, which primarily fund their Philippine operations through deposits sourced from their headquarters abroad, will now face a more equitable competitive environment.”
On the other hand, Mr. Dacanay said the impact of the cut will likely be marginal.
“Though this may marginally offer some support to the economy, we do not think this RRR cut will serve as a substantial short-term boost to growth. This is because the liquidity injected will likely be re-absorbed by the BSP’s monetary tools,” Mr. Dacanay added.
Mr. Ricafort said the RRR cut should be “policy neutral” as it is being phased out as the main liquidity management tool due to the shift towards term deposit facility (TDF) and BSP securities auctions instead.
“On the demand side, demand for credit may still be tepid as households wait for the easing cycle to end (i.e. for policy rates to bottom) before taking out a loan,” Mr. Dacanay said, noting there was no change in the loan-to-deposit ratio after the October RRR cut.
INFLATIONARY IMPACTMeanwhile, analysts said the reduction in banks’ reserve requirements is unlikely to result in significant inflationary pressures.
“This latest RRR cut is timely, as the BSP’s recent decision to keep its policy rate steady will likely mitigate any inflationary impact,” Mr. Neri said.
He said the country’s financial system is “well-positioned to absorb the additional liquidity in an orderly manner.”
“Banks have also gained valuable experience in managing liquidity from recent RRR reductions, ensuring a smooth implementation of this policy change,” he added.
Chinabank Research said it will not necessarily be inflationary, similar to the previous cut, amid the BSP’s toolkit for managing liquidity.
The central bank has said the risks to the inflation outlook have become “broadly balanced” for this year and the next.
The BSP expects inflation to average 3.5% this year and 3.7% in 2026, both still within the 2-4% target band.
“The timing of the cut is important. With inflation still being closely monitored, the move suggests the BSP is confident that liquidity management tools can offset any inflationary risks arising from increased money supply,” Mr. Rivera said.
With the cut, analysts said the RRR is at a manageable level.
“I think compared to our ASEAN (Association of Southeast Asian Nations) neighbors, we are at a good place. The goal previously was to bring it down to single digit and now it’s at 5%. For now, I believe this is sufficient,” Mr. Asuncion said.
Mr. Ella said he believes the BSP is “done” with cuts in the RRR.
Mr. Rivera said the cut brings the Philippines closer to neighbors like Malaysia and Thailand where reserve requirements are lower.
“However, at 5% for big banks, it remains relatively high by regional standards. While further reductions may be warranted, these should be calibrated carefully to avoid excessive liquidity that could stoke inflationary pressures,” he said.
Meanwhile, Mr. Dacanay said that the lower RRR will likely “strengthen the transmission of monetary policy.”
“With the RRR lower, the BSP’s incoming easing cycle will likely be faster and more effective in boosting growth as there is more to lend at lower interest rates,” he said.
The BSP has been looking for ways to improve its transmission mechanism, which Mr. Remolona earlier said has “long lags.”
“With the RRR cut serving as an accommodative measure for the economy, the RRR cut could give room for the BSP to potentially delay further policy rate cuts,” Chinabank Research said.
“Unlike a reduction in the policy rate, an RRR cut would provide support for economic growth without risking a depreciation of the Philippine peso.”
Earlier this month, the BSP unexpectedly left rates steady at its policy review, leaving the benchmark unchanged at 5.75%.
