THE Bangko Sentral ng Pilipinas (BSP) is keen on making a “substantial” reduction in the Reserve Requirement Ratio (RRR) for banks this year.
In a briefing on Wednesday, BSP Governor Eli M. Remolona Jr. told reporters that the reduction in the RRR this year will be followed by further reductions in 2025.
Currently, the RRR stands at 9.5 percent, which Remolona said last month, was “a ridiculous level.” The target of the BSP is to reduce this to about 5 percent.
“We will reduce reserve requirements substantially this year and then there may be further reductions by next year,” Remolona said.
Remolona said that in exchange for the cut in the RRR, Philippine banks are willing to reduce transaction costs on payments. Regardless of this “funny dynamic,” Remolona said it is important to reduce the RRR “in a substantial way.”
“There’s a funny dynamic that’s going on. The banks want a reduction of the reserve requirement and they’re saying if you do reduce it, we’ll do this other thing for you, reduce transactions costs on payments, for example. We’re trying to manage that,” Remolona said.
BSP Monetary Policy Sub-Sector Assistant Governor Zeno Ronald R. Abenoja said if the RRR is reduced, this could lead to additional liquidity to grow the economy through the increase in economic activities.
Abenoja said, however, this will not be an immediate consequence. He explained that some of the liquidity needs to be deployed by banks in various financial markets.
Remolona admitted that the transmission mechanism of monetary policy continue to be saddled by long lags. This is “because the markets are not deep and liquid.”
“At the same time, we’re trying to improve the liquidity of the markets to shorten those lags. But that’s an effort that will take some time,” Remolona said.
In February 2023, the Bankers Association of the Philippines (BAP) said they were receptive to bringing down transaction costs in lieu of lowering the RRR.
The BSP earlier said they will be working with the BAP to make transactions free of cost for small amounts.
BSP said paying P5 to P10 per transaction or as much as P15 to P20 per transaction is significant, especially relative to small transactions of around P200 to P500.
The BSP hopes that bringing down the RRR would encourage banks to waive the fees for these amounts. (See: https://businessmirror.com.ph/2023/02/28/bap-open-to-scuttling-costs-for-small-transactions/)
