The Bangko Sentral ng Pilipinas (BSP) is expected to slash its reserve requirement ratio (RRR) by 200 basis points for universal and commercial banks in the second quarter.

HSBC economist Aris Dacanay said the lower RRR will encourage Filipino households to consume more goods and services through more affordable loans, leading to the country’s higher economic growth.

He added this move will support the BSP’s possible easing of its benchmark for lending rates by a total of 75 basis points to 5 percent this year.

Growth, rather than inflation is main concern

“Inflation is not so much of a concern with overall prices well within the BSP’s 2 to 4 percent target band. Rather, the concern is with growth and the engines that support it,” Dacanay said.

A lower RRR allows banks to lend a bigger portion of their deposit funds to clients at lower costs.

A reduction of 200 basis points in the RRR of universal and commercial banks will contract non-loan deposits to 5 percent from 7 percent. Previously last September, the BSP cut the RRR from 9.5 percent.

Rizal Commercial Banking Corp. chief economist Michael Ricafort said the RRR cut will free up P330 billion for lending.

Dacanay’s statements came after household consumption in the fourth quarter of 2024 slowed to 4.7 percent from 5.2 percent in the third quarter based on data from the Philippine Statistics Authority.

This brought economic growth down to 5.2 percent in the last quarter of 2024 from 5.5 percent in the same period in 2023.

Surprised on the downside

Given the Christmas celebrations during that period, Dacanay said household consumption “surprised on the downside.”

To ensure higher household spending, the economist said HSBC also projects the BSP to further ease its policy rate by 25 basis points each on 13 February and in August and December.

Dacanay said the BSP will likely pause cutting rates briefly, narrowing the gap with the US Federal Reserve’s own policy rate which is seen to remain elevated to prevent inflation spikes from US President Donald Trump’s radical economic policies.

Dacanay said BSP’s measured approach will keep the peso and the country’s investment levels through fixed-income securities competitive.

Slight average inflation rise

Last December, BSP Governor Eli Remolona Jr. said the average inflation this year might slightly rise to 3.4 percent from the previous estimate of 3.3 percent due to geopolitical tensions and Trump’s protectionist policies, such as high tariffs on US imports, and anti-immigration stance.