(Bloomberg) -- The Philippine central bank is looking to cut banks’ reserve requirement ratio significantly before yearend, according to Governor Eli Remolona, a move that’s expected to unleash billions of pesos into the financial system.
“We will reduce the reserve requirement substantially this year, and then there may be further reductions by next year,” Remolona said at a media briefing in Manila on Wednesday. He didn’t specify the extent of cuts in the RRR, currently at 9.5% of deposits that bigger banks must set aside in reserve.
The governor’s comments come a month after the Bangko Sentral ng Pilipinas kicked off a rate cut cycle to lower the benchmark interest rate from a 17-year high. While the BSP had long stressed that the reserve requirement isn’t a monetary policy tool, it held off from triple R cuts during Remolona’s term so as not to cause confusion.
Banks have long sought lower RRR from the BSP to trim their costs and free up billions of pesos of funds required by the authorities to be locked in their vaults. Bank of the Philippine Islands, one of the country’s largest lenders, had even proposed a conditional, instead of a uniform reserve requirement cut, according to a GMA News report last month.
“There’s a funny dynamic going on: the banks want a reduction in reserve requirement, and they’re saying that if you do reduce it, we will do this other thing for you, reduce transactions cost for payments, for example,” the governor said. “So we are trying to manage that.”
As for its next interest rate move, the BSP will focus on the country’s data, instead of the action of the Federal Reserve, which markets expect to start lowering interest rates this week for the first time in over four years.
“What the Fed will do is one data point for us. It’s not most of the data,” Remolona said. The BSP’s next policy meeting is set for Oct. 17. Earlier this year, the governor said that he wants to slash the triple R to 5% by the end of his term in 2029.
The BSP last lowered the triple R in June 2023, when Remolona’s predecessor, Felipe Medalla, cut the ratio by 2.5 percentage points to 9.5%. That move was estimated to have released 325 billion pesos ($5.8 billion) into the financial system.
--With assistance from Ditas Lopez.
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