MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) is reducing the reserve requirement ratio (RRR), or the amount banks need to hold against their deposits.
In a statement on Friday, February 21, the BSP said it will cut the RRR for universal and commercial banks by 200 basis points (bps), digital banks by 150 bps, and thrift banks by 100 bps.
The following new RRRs will take effect on the week of March 28 for local currency deposits and deposit substitute liabilities:
- Universal and commercial banks, non-bank financial institutions: from 7% to 5%
- Digital banks: from 4% to 2.5%
- Thrift banks: from 1% to 0%
The monetary authority said in a statement that reducing the RRR will “lessen frictions that hinder financial intermediation.”
The BSP last slashed RRRs in September 2024. It initially bared plans to cut the reserve ratio to 5% in the middle of the year.
How do RRR cuts affect the economy?
The RRR is a monetary policy tool which dictates the percentage of a bank’s total deposits that it must withhold instead of utilizing them for loans.
Central banks often set the RRR to regulate the supply of money circulating in the economy, maintaining stability in the domestic banking system. This also allows central banks to control inflation and manage the economy’s health.
The RRR is often slashed when central banks want to stimulate more economic activity, as it allows banks to have more funds available for lending at lower borrowing costs.
In a press conference on Thursday, February 13, BSP Governor Eli Remolona Jr. hinted that the monetary authority would slash the RRR earlier than initially planned.
Remolona described the RRR cut as a “neutral” one compared to the slashing of key interest rates. Unlike the benchmark rate, which may be cut or hiked during a Monetary Board meeting, Remolona said that RRRs are more structural.
“It serves to stimulate the economy, but it also reduces the distortion in the financial system. So that’s why we think it’s a structural measure rather than a cyclical measure,” he explained.
During the Monetary Board’s meeting on Thursday, February 13, the BSP paused its easing cycle and kept key interest rates steady at 5.75%. The monetary authority said it wanted to further monitor the impact of global trade uncertainties on the Philippine economy.
The country’s inflation rate remained steady in January at 2.9%, while the government missed its gross domestic product (GDP) growth targets in 2024. – Rappler.com