3 weeks ago
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Keisha Ta-Asan - The Philippine Star
February 24, 2025 | 12:00am
Stock photo of a peso money bill.
Philstar.com / Irra Lising
MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) has moved forward with its long-standing goal of reducing banks’ reserve requirement ratios (RRR), which is expected to inject at least P300 billion in additional liquidity into the financial system.
However, analysts believe that the immediate impact on economic growth may be muted, as much of the excess liquidity will likely be absorbed through the central bank’s monetary tools.
Aris Dacanay, economist for ASEAN at HSBC, said the latest RRR cut is expected to inject approximately P382 billion of liquidity into the financial system.
“Though this may marginally offer some support to the economy, we do not think this RRR cut will serve as a substantial short-term boost to growth. This is because the liquidity injected will likely be re-absorbed by the BSP’s monetary tools such as BSP securities and repo facilities,” he said.
He cited the BSP’s RRR cut in October 2024, which injected P450 billion into the economy but was offset by the central bank’s absorption of P521 billion through its liquidity operations.
Demand for credit may also be tepid as households wait for the BSP’s easing cycle to end before taking out loans.
Still, a lower RRR will likely strengthen the transmission of monetary policy.
“With the RRR lower, the BSP’s incoming easing cycle will likely be faster and more effective in boosting growth as there is more to lend at lower interest rates,” Dacanay said.
In a commentary, BPI lead economist Jun Neri said the RRR cut is expected to release at least P300 billion of liquidity into the financial system, with the potential for further expansion through bank lending.
He also said the move is timely, as the BSP’s decision to keep policy rates steady at its February meeting should mitigate inflationary risks from the increased liquidity. Banks also have gained experience in handling RRR reductions, ensuring a smoother implementation of the policy.
“The financial system is well-positioned to absorb the additional liquidity in an orderly manner, thanks to the central bank’s other tools for managing excess liquidity,” Neri said. “The RRR cut is anticipated to boost lending, providing banks with greater flexibility in allocating resources.”
He noted that the previous RRR cuts in 2023 and 2024 helped accelerate loan growth from around seven percent in mid-2023 to 12.2 percent by December 2024.
“Still, a number of banks may have been constrained by a real estate demand slump caused by remote work and the POGO (Philippine offshore gaming operators) ban. With the RRR cut, borrowers outside the property sector are likely to gain easier access to funds,” he said.
Moreover, the RRR cut is expected to level the playing field between local and foreign banks. Neri said foreign banks, which primarily fund their Philippine operations through deposits from their headquarters abroad, will now face a more equitable competitive environment.
Last week, the BSP slashed the RRR for big banks by 200 basis points to five percent from seven percent. The RRR for digital banks was likewise slashed by 150 basis points to 2.5 percent from four percent.
Meanwhile, the level of deposits mid-sized or thrift banks are required to keep with the BSP was lowered by 100 basis points to zero percent from one percent. The new ratios will take effect on March 28.
