Bangko Sentral ng Pilipinas Governor Eli Remolona Jr. is looking to “substantially” reduce the reserve ratio requirement (RRR) of private banks this year.

The RRR allows banks to lend more to clients.

“We will reduce the reserve ratio requirement substantially this year, and we may further cut it by next year,” he told the media on Wednesday at the BSP Main Building in Manila City.

His statement came after the BSP eased its policy rate last month by 25 basis points to 6.25 percent due to projected lower inflation rates and slowed private consumption.

The RRR has remained high at 9.5 percent. In May, Remolona said the BSP was studying to bring down the RRR to 5 percent, stressing that the local ratio is much higher than those in neighboring countries, such as Indonesia with 3.5 percent and Malaysia with 2 percent.

Rizal Commercial Banking Corp chief economist Michael Ricafort said a one percentage point reduction in the RRR releases P159 billion into the financial system, helping boost economic growth.

Lower intermediation costs

“This would lead to lower intermediation costs by banks and would be passed on in terms of lower lending rates. There will be more funds available for bank lending to consumers, businesses, the government, and other institutions,” he said.

However, in deciding the size and timing of the RRR cut, HSBC economist Aris Dacanay said the BSP considers possible overheating of the economy.

“Recall that the Philippine economy was overheating in 2022 and 2023, with investment in the economy much more than what it was saving,” Dacanay said.

Between 2021 and 2023, HSBC data shows the investment rate reached 27 percent while the savings rate settled at 13 percent.

Through BSP securities with 28-day and 56-day terms, the central bank aims to absorb excess liquidity from the private sector due to their increased activities under the more relaxed monetary policy.

“Some of it will be deployed by banks in various financial markets, including government securities equity, but some of it may still reside in their accounts, including depositing it back to the central bank” BSP Assistant Governor Zeno Ronald Abenoja said.