Security Bank expects the Bangko Sentral ng Pilipinas (BSP) to gradually slash the reserve requirement ratio (RRR) for universal and commercial banks from 5 percent to 3 percent next year to maintain sustainable economic growth.

Security Bank chief economist Angelo Taningco said the BSP will further cut the RRR by 200 basis points (bps) by next year and 150 bps each in 2027 and 2028 toward a ratio of 0 percent.

“A lower RRR means less friction cost for banks’ lending as they are financial intermediaries and more growth prospects,” he told the media last Wednesday.

Taningco said an RRR reduction of 200 bps allows banks to lend additional P325 billion to clients, contributing to economic growth through stronger household spending for goods and services.

However, he said the BSP will likely cut the RRR gradually to prevent inflation rates from spiking due to excessive household consumption.

Liquidity rise equals inflation spike

“More liquidity means higher inflation, so the BSP needs to strike a balance in managing prices of goods and services and driving economic growth,” Taningco said.

Last week, the BSP cut the RRR for universal and commercial banks to 5 percent from 7 percent a year ago and from 9.5 percent in the earlier years.

Meanwhile, the RRR for rural and thrift banks and cooperatives was already lowered to 0 percent.

The RRR cuts were announced after the country’s economic growth slowed to 5.6 percent last year from 5.5 percent in 2023, according to the Philippine Statistics Authority. This was also below the government’s minimum target of 6 percent.

The weaker economic growth reflected tamer household consumption of 4.7 percent in the last quarter of 2024 from 5.2 percent in the third quarter, despite the Christmas activities.