Bangko Sentral ng Pilipinas (BSP) Governor Eli Remolona Jr. said he is looking to lower the bank’s reserve requirement ratio (RRR) to 5 percent from 9.5 percent, following a better-than-expected inflation last month and slower household consumption in the first quarter.

“We would like to reduce the RRR by quite a bit because I think it’s distorting financial intermediation,” he said Friday in a television interview.

A lower RRR allows banks to lend more funds to their customers.

Remolona’s statements came after the BSP kept its 6.5 percent policy rate on Thursday to bring inflation closer to its 2 percent minimum target.

Inflation slightly rose to 3.8 percent in April from 3.7 percent in March, according to recent data of the Philippine Statistics Authority (PSA).

However, given the higher interest rate, household consumption continued to slow to 4.6 percent in the first quarter from 5.3 percent in the previous quarter.

“The BSP rate hike in October is still having effect. The rate effect peaks at about one year after the rate change,” Remolona said.

He added the policy-making Monetary Board remains hawkish as prices of food and fuels might still rise due to persisting El Niño and geopolitical tensions in the Middle East.

He said this means the RRR cut will not come immediately as the BSP aims to manage inflation by preventing excessive demand for goods and services.

Previous year’s denominator

“The inflation rate has been looking good and output growth has remained intact. These make us confident about possibly easing the policy rate in the second half of this year,” Remolona said.

“But we don’t want to do the RRR cut while we’re still hawkish,” he stressed.

The BSP will again announce any policy rate adjustment in August.

Given the demand-side risks from possibly lower interest rates, Remolona said the RRR cut will likely not coincide with the easing of the BSP policy rate.

However, Remolona said that the BSP is now “less hawkish” as the latest inflation increased partly due to the statistical principle of base effect.

The BSP expects inflation to decline from projected higher food supply in the second half of the year as the weather improves.