Bangko Sentral ng Pilipinas (BSP) Governor Felipe M. Medalla said they plan to reduce banks’ reserve requirement ratio (RRR) within the first six months of the year, or before June.

Medalla on Thursday, Jan. 12, told cable TV ANC’s Market Edge that BSP does not want a 12 percent RRR, which is the current ratio.

“I think that (RRR cut) will happen. The likelihood that it will happen in the first semester is quite high,” he said.

The BSP intends to cut the 12 percent RRR for big banks, as well the 14 percent ratio for non-banks with quasi banking functions, and bring it down to single-digit levels. Thrift banks have three percent reserves ratio while rural banks have two percent.

The Monetary Board has approved as much as a 400 basis points (bps) reduction in the ratio but the BSP only used up 200 bps to cut the RRR in 2020.

Since it was a pandemic, the BSP found no real reason to cut the RRR further, especially because in 2020, they implemented a pandemic relief measure where banks are allowed to comply with reserve requirement rules by loaning to micro, small and medium enterprises and select large enterprises that are not tied to conglomerates.

“We don’t want to confuse the market. It’s hard to be raising policy rates and cutting reserve requirements (ratio). Although we should be able to do that because we can offset the cut in reserve requirements by increasing our borrowings. But given the situation, the last thing you want to do is confuse the signals,” said Medalla.

The BSP chief has already signalled to the market that they might increase the policy rate in February and March. He said this week that on Feb. 16, the next policy meeting, they are looking at 25 bps to 50 bps rate hike. This is to ensure that inflation rate will fall to within normal levels by the third quarter 2023.

“When we are no longer under pressure to raise policy rates, then we will cut because we don’t think it is healthy to have a 12 percent reserve requirement,” said Medalla.

The temporary relief measure of allowing banks to release RRR-compliant loans expired last Dec. 29.

“We have to replace that temporary measure by a permanent measure which is a cut in the RRR,” said Medalla.

Since a lower RRR reduces intermediation costs, the BSP wants to reduce the ratio to single-digit levels by 2023.

The BSP’s primary monetary policy instrument is the interest rate on its reverse repurchase facility. But BSP has the option to reduce banks’ reserve requirements to control inflation and to siphon off liquidity via its weekly auctions of securities and term deposits.

The last RRR cut was in 2020 of 200 bps. At the time, the BSP’s purpose is to calm the markets and to encourage banks to continue lending to both retail and corporate sectors.

In 2019, the BSP reduced the RRR by 400 bps, more than the 200 bps adjustment in 2018.