MANILA, Philippines — The reduction in banks’ reserve requirement ratios (RRR) last week will inject over P300 billion in liquidity into the financial system, which would help boost economic growth, analysts said.
In a report written by economists Euben Paracuelles and Nabila Amani, Nomura Global Markets Research said the impact of the recent RRR cut by the Bangko Sentral ng Pilipinas (BSP) will be substantial compared to the last RRR cut in June 2023.
“We estimate the impact of the 250-basis-point RRR cut to be a liquidity injection of around P310 billion to P330 billion,” Paracuelles and Amani said. This is around 1.2 percent of full-year 2024 gross domestic product.
They said the impact on money supply growth was relatively muted last year as it was intended to coincide with the expiration of some pandemic-linked measures.
Central bank instruments such as the term deposit facility will be used more actively to absorb excess liquidity under the BSP’s interest rate corridor framework, the Nomura economists said.
“We believe the availability of these new instruments gives BSP the flexibility to manage the liquidity impact better and as a result, gives it scope to cut the RRR further in a bid to reduce disintermediation risks and make banks more regionally competitive,” they said.
On Friday, the BSP announced a 250-basis-point cut in the RRR for big banks as well as non-bank financial institutions with quasi-banking functions, to seven percent effective Oct. 25 from the current level of 9.5 percent.
Likewise, the RRR for digital banks was reduced by 200 basis points to four percent from six percent, while the RRR for thrift banks was cut by 100 basis points to one percent from two percent.
The level of deposits small or rural and cooperative banks are required to keep with the BSP was lowered to zero from one percent.
Michael Ricafort, chief economist of Rizal Commercial Banking Corp., said at least P150 billion per one percentage point of RRR cuts will be released into the financial system.
This is equivalent to a total of at least P375 billion for the 2.5-percentage-point RRR cuts in large banks and a total of about P400 billion for all other bank types.
“This would lead to lower intermediation costs by banks and would be passed on (to borrowers) in terms of lower lending rates,” Ricafort said.
“Thus, the latest RRR cut would increase demand for loans and would boost economic growth, as part of monetary easing measures, as inflation remains well anchored with the central bank’s target.”
The move would also make more funds available for investments in the financial markets such as bonds and other fixed income investments, stocks, foreign currencies, property, among others, he said.
Meanwhile, Nomura said the BSP will still cut policy rates by 25 basis points at each of the October and December meetings, and by 75 basis points in the first three meetings in 2025, bringing the policy rate to five percent by May 2025 from the current level of 6.25 percent.
Paracuelles and Amani noted that the early RRR reduction reflects BSP’s greater confidence on the inflation outlook, which is also supporting its easing cycle.
“With inflation remaining on a downward path, BSP has scope to further remove the restrictiveness of its monetary stance,” they added.