BSP expected to cut banks’ reserve ratio

February 17, 2025 | 12:00am

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to push ahead with a planned 200-basis-point (bp) cut in banks’ reserve requirement ratio (RRR) as early as April, following its decision last week to keep policy rates steady.

Citi economist for the Philippines Nalin Chutchotitham said reducing the RRR of big banks would support economic activity while having a limited impact on the exchange rate, unlike policy rate cuts that directly influence capital flows and currency movements.

“The recent RRR cut of 200 bp in October 2024 has likely provided an additional loosening effect on financial conditions, supporting credit growth and overall domestic demand,” she said.

Nomura economists Euben Paracuelles and Nabila Amani also adjusted their RRR forecast, moving their expectation of a 200-bp cut to April from mid-2025.

“We think April is a plausible window, as demand for liquidity could pick up ahead of the midterm elections on May 12,” they said, adding that the sequencing of RRR cuts before further rate reductions makes sense in improving monetary policy transmission.

“From BSP’s perspective, these cuts are consistent with its longer-term goal of reducing the RRR to single-digit levels, but also helping to further improve the transmission of its policy rate cuts later in the year,” Paracuelles and Amani added.

Last week, BSP Governor Eli Remolona Jr. said the central bank plans to cut lenders’ RRR in the first half by 200 bps, bringing big banks’ RRR to five percent from the current seven percent level.

“The timing is still under discussion, but I think it will be fairly soon, maybe sooner than the middle of the year,” he told reporters in a briefing following the Monetary Board’s first policy review.

Meanwhile, analysts said the rate pause last week reflects the central bank’s cautious approach amid global uncertainties, inflationary risks and foreign exchange volatility.

Chutchotitham said Citi revised its policy outlook for this year. It now forecasts 25-bp rate cuts in April, August and December instead of its earlier projections for February, June and August.

“While we think the BSP could afford to cut a total of 75 bps this year, considering a high real policy rate and positive interest rate differential with the US Federal Reserve, Remolona’s more cautious forward guidance means a third cut still hinges on several factors besides domestic demand and inflation,” she said.

She added that the BSP remains concerned about peso depreciation and its potential pass-through effects on inflation, particularly through imported food and energy costs.

Nomura said the rate pause was a sign that the BSP is slowing its easing cycle.

“We now expect the BSP to cut on April 3, Aug. 28 and Dec. 11 – one cut every other Monetary Board meeting instead of consecutive reductions,” Paracuelles and Amani said.

Aris Dacanay, HSBC economist for ASEAN, said the BSP is concerned about forex volatility despite weak household consumption and inflation remaining within target.

“Flexibility is an asset if there would be any sudden re-pricing of Fed rates. Pausing the easing cycle would lend support to the peso and mitigate the risk of forex-induced inflation if, say, US trade policies lead to renewed dollar strength,” he said.

The peso has remained under pressure from a strong dollar in recent months. Remolona confirmed that the central bank has intervened in the foreign exchange market from time to time to mitigate significant volatility.