BSP wants to cut banks’ reserve ratio by almost half, governor tells Bloomberg TV

The country’s monetary regulator intends to reduce banks’ reserve requirement ratio — a portion of their deposits cannot be used for commercial lending — by almost half once the inflation rate eases.

In an interview with Bloomberg TV’s Yvonne Man and Stephen Engle Friday morning, Bangko Sentral ng Pilipinas Governor Eli Remolona Jr. said the regulator can reduce the reserve requirement to 5% from its current level of 9.5%, which he described as one of the highest levels in the region.

“We would like to reduce the reserve requirement by quite a bit because I think it's distorting financial intermediation,” he said, even as he stressed that the timing of any such reduction would be important.

“We don't want to do it while we're still hawkish,” Remolona said.

Each percentage point reduction in banks’ reserve requirements releases almost P150 billion worth of liquidity into the economy, so a cumulative four-and-a half percentage point reduction would result in almost P675 billion in cash flowing into the Philippine financial system.

This would result in cheaper loans for borrowers that would boost economic activity but, on the downside, can also fuel inflation.