BSP cuts reserve requirement levels

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) delivered a surprise yesterday as it announced a major reduction in the amount of deposit banks are required to keep, to single-digit levels.

BSP Governor Felipe Medalla, in an interview with reporters said the Monetary Board has approved the reduction in the reserve requirement ratio (RRR) effective June 30.

Medalla said the regulator slashed the RRR for universal and commercial banks, as well as non-bank financial institutions with quasi-banking functions (NBQBs), by 250 basis points to 9.5 percent from the current level of 12 percent.

The BSP chief said the RRR for digital banks was likewise slashed by 200 basis points to six percent from eight percent.

Furthermore, the level of deposits mid-sized or thrift banks are required to keep with the BSP was lowered by 100 basis points to two percent from three percent, while that of small banks or rural and cooperative banks by 100 basis points to one percent from two percent.

“The new ratios shall take effect on the reserve week beginning June 30, 2023 and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs,” Medalla said.

The reduction in reserve ratios is intended to coincide with the expiration of alternative modes of compliance with reserve requirements involving loans to micro, small and medium enterprises (MSMEs) by end-June this year, and will ensure stable domestic liquidity and credit conditions.

“This operational adjustment is in line with the BSP’s ongoing efforts toward a more active and flexible approach to liquidity management through market-based monetary operations,” he said.

This includes the inaugural offering of the 56-day BSP bills on June 30, which serves as an additional instrument for absorbing system liquidity.

The BSP chief clarified that the lower RRR does not constitute any shift in the BSP’s monetary policy settings.

“The BSP continues to prioritize bringing inflation back toward a target-consistent path over the medium term and will continue to signal its monetary policy stance through the key policy interest rate, or the rate on the overnight reverse repurchase facility,” he said.

Medalla said the central bank’s Monetary Board could extend its prudent pause for the second straight rate-setting meeting on June 22 as the inflation downtrend to 6.1 percent in May from 6.6 percent in April confirmed that the consumer price index is likely to hit below four percent by September or October this year.

“My own view is the pause is very likely to continue because the recent data is actually consistent with it. Of course, I cannot speak for the Monetary Board,” Medalla said.