Philippines: BSP cuts the RRR – UOB

Bangko Sentral ng Pilipinas (BSP) announced on Thu (8 Jun) that it will reduce the reserve requirement ratios (RRRs) by 250bps for big banks to 9.5%, 200bps for digital banks to 6.0%, 100bps for thrift banks to 2.0%, as well as 100bps for rural and cooperative banks to 1.0%. These new ratios will apply to the local currency deposits and deposit substitute liabilities of banks and non-banks, effective 30 Jun. It will unleash fresh funds of as much as PHP300bn in the financial system.

This announcement comes as no surprise as BSP Governor Felipe Medalla has hinted such move in mid-May and former BSP Governor Benjamin Diokno (who is now Finance Secretary) had previously committed to bring down the RRR for big banks to single digits before his governor term ends on 3 Jul this year. This 2023 deadline for the RRR reduction to single-digit levels was first announced by the late BSP Governor Nestor A. Espenilla Jr. in 2017.

The central bank emphasized that the lower reserve requirements do not constitute any shift in the BSP’s monetary policy settings but it is an operational adjustment to ensure stable domestic liquidity and credit conditions. Recognizing this assertion and expectations of a persistent downtrend in the country’s inflation towards the central bank’s 2.0%-4.0% target range by 4Q23, we stick to our view that BSP will extend its rate pause for the rest of the year. In other words, the overnight reverse repurchase (RRP) rate will be left unchanged at 6.25% until year-end, with forward US rate trajectory being the key swing factor.