The Bangko Sentral ng Pilipinas (BSP) on Friday reduced the reserve requirement ratio for universal and commercial banks by 250 basis points (bps) to 7 percent from 9.5 percent, following a lower inflation rate and slowed private consumption recently.

The BSP move came a day after the substantial 50 basis points decrease in the US Federal Reserves rate the other day.

The RRR reduction will enable banks to draw a bigger portion of their funds for lending to various customer segments.

The BSP also lowered the RRR by 200 bps to 4 percent for digital banks and by 100 bps to 1 percent for thrift banks.

Similarly, the BSP announced a 100 bps reduction for rural banks and cooperatives, bringing their RRR to 0 percent.

The lower ratios will take effect starting 25 October.

Lower loans cost

“The reductions will lower intermediation costs and promote better pricing for financial services,” BSP said in a statement.

“As inflation continues to track a target-consistent path over the next two years, the BSP will reassess the need for further reductions in the RRRs to better align them with regional norms over the medium term,” the central bank added.

BSP Governor Eli Remolona Jr. had said the Philippines has been imposing a much higher RRR for universal and commercial banks at 9.5 percent, compared to Indonesia’s 3.5 percent and Malaysia’s 2 percent.

Security Banking Corporation chief economist Dan Roces said the lower RRR will help expand the economy as individual consumers and businesses acquire new goods and services.

“It frees up substantial liquidity into the system, so that should help shore up needed capital to aid in economic growth,” he said.

The RRR reductions come after the BSP eased its policy rate by 25 basis points to 6.5 percent last month to encourage more spending by the private sector under a projected low inflation environment.

According to the Philippine Statistics Authority, household consumption in the second quarter grew slower at 4.6 percent from 5.5 percent recorded in the same period last year.

While a higher demand for consumption of goods and services raises the inflation rate, Jonathan Ravelas, senior adviser of Reyes Tacandong & Co., said the sizes of the RRR cuts might “not be inflationary” as the BSP deploys measures to curb spending.

Remolona said the BSP has increased offerings of short-term securities to absorb excess liquidity.

“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 explained.

The BSP projects inflation to settle at 3.3 percent this year and 2.9 percent in 2025 before rising to 3.3 percent in 2026.

Meanwhile, the Development Budget Coordination Committee expects the economy to grow by 6 to 7 percent this year, 6.5 to 7.5 percent in the next, and 6.5 to 8 percent by 2028.