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BSP. The Bangko Sentral ng Pilipinas headquarters in Quezon City on May 31, 2023.
Jire Carreon/Rappler
The RRR is a monetary policy tool which regulates the amount of reserves commercial banks must hold against their deposits
MANILA, Philippines – The Bangko Sentral ng Pilipinas (BSP) may cut the country’s benchmark interest rate by 50 basis points (bps) and the banks’ reserve requirement ratio (RRR) by 200 basis points in 2025.
According to BSP Governor Eli Remolona Jr., this will bring the RRR for big banks to 5% from the current 7%. If implemented, the reserve requirement would require big banks to hold 5% of their funds in reserve instead of lending them out.
Remolona said the central bank may cut reserve requirements by mid-year.
“Maybe in the middle of the year. So, either June or July. We’re still discussing it,” he said in a mix of English and Filipino.
Remolona said the central bank will monitor the gross domestic product (GDP) growth over time before making the final decision. “We’re still figuring out why the [GDP] number came out lower than expected,” he explained.
The Philippine economy grew slower than expected in 2024 at 5.6%, below the government’s 6%-6.5% target.
What is the RRR?
The RRR is a monetary policy tool which helps regulate the amount of reserves commercial banks must hold against their deposits. This means banks must keep a certain percentage of its total deposits in reserve rather than utilizing them for loans.
Central banks set the RRR to regulate the supply of money circulating in the economy, manage liquidity and maintain stability in the banking system. This also allows central banks to control inflation and manage the economy’s health.
The RRR is often slashed when central banks want to stimulate more economic activity, as it allows banks to have more funds available for lending.
“They [policy rate and RRR cuts] both stimulate the economy. But the nice thing about the reserve requirement is it affects both the deposit rate and the lending rate. Kasi parang nasa gitna siya (Because it’s kind of the middle). So it should raise the deposit rate a little bit if you cut the reserve requirement while lowering the loan rates,” Remolona said.
The BSP last slashed the RRR to 7% for big banks in September 2024.
More policy rate cuts
Remolona denied that the BSP will follow in the footsteps of the US Federal Reserve and cut the benchmark rate by 75 bps or 25 bps per quarter, saying it would be too much.
Instead, the Monetary Board may slash the key policy rate by 50 bps. Remolona is eyeing an initial 25-bps or 0.25% cut in the first half, and another 25-bps cut in the second half.
“Kasi kailangan din natin ng konting policy insurance [against inflation],” he said.
(We still need to have a bit of a policy insurance against inflation.)
Remolona earlier said the rate cuts are on the table for the Monetary Board’s first policy meeting of the year on February 13.
Just like RRRs, the key policy rate is used by central banks to curb inflation. A rate increase will, in theory, decelerate inflation as it discourages companies and consumers from spending due to high borrowing costs. Meanwhile, a rate cut will stimulate the economy by making it cheaper to borrow money. (READ: How interest rate hikes impact your money and the economy)
The Philippine Statistics Authority (PSA) will release the Philippines’ January inflation print on February 5. The BSP forecasts inflation to fall within 2.5%-3.3% due to rising prices in petroleum and major food items. – Rappler.com
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