Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. says it is possible to eliminate the reserve requirement ratio (RRR) of banks within his term. PHOTO FROM BSP.GOV.PH
Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said it is possible to eliminate the reserve requirements for banks within his term, a move that would create an easy liquidity condition for the economy.
“Pwede (It’s possible),” Remolona told reporters on Monday when asked about the chances of bringing the reserve requirement ratio (RRR) of banks to zero before his six-year term ends in 2029.
But for now, the BSP chief said the policy-making Monetary Board is discussing the possibility of trimming the RRR to 5 percent, arguing that the ratio is still high despite being slashed to 7 percent beginning Oct. 25.
”But we will get there,” Remolona said.
READ: Remolona: BSP may resume RRR cuts this year
The RRR refers to the certain amount of deposits that banks must set aside as standby funds, which do not generate returns because they cannot be used for lending activities.
This is to ensure that lenders are able to meet their liabilities in case of sudden withdrawals. But there are countries like the United States where the RRR for banks is zero.
Late last month, the BSP said the RRR for big banks and non-bank financial institutions will be trimmed by 250 basis points (bps) to 7 percent, from 9.5 percent. Trimming the ratio would “lower intermediation costs and promote better pricing for financial services,” the central bank explained.
READ: Remolona gets ‘A-’ in global central bankers’ report card
At the same time, the triple R reduction would allow banks to deploy more cash for lending, which can help boost an economy that historically gets about 70 percent of its fuel on consumption. Remolona previously the BSP might cut the RRR again next year.
Overall, the RRR reductions would complete Remolona’s plan to create easier liquidity conditions for the economy. Back in August, the BSP had trimmed its policy rate by 25 bps to 6.25 percent, kicking off an easing cycle meant to lower borrowing costs at spur bank lending.
“We expect the BSP to deliver one of the deepest rate-cutting cycle in the region and the simultaneous liquidity injection, via three 250 bps RRR cut each in 2023, 2024 and 2025, should further support risk appetite including banks’ demand for bonds,” ANZ Research said in a report. — Ian Nicolas P. Cigaral