NextGen Day

According to Bangko Sentral ng Pilipinas (BSP) Governor Felipe Medalla, any changes to the reserve requirement ratio (RRR) for banks will only be made when the country’s inflation rate is on a stable downward trajectory.

In a Friday discussion with journalists, Medalla stated that reducing the RRR at this time will confuse the market given the increases in the main rates of the central bank to help combat the high inflation rate.

“I’ve got this situation. We can cut when inflation, which is currently above 4 percent but obviously on the decline, and everyone agrees is unstoppable,” he said.

The rate increases aim to, among other things, restrict the amount of extra liquidity entering the system to assist control the high domestic demand. This will be countered by a reduction in the RRR because it will inject more liquidity into the domestic economy.

The RRR of universal and commercial banks (U/KBs) was last decreased by the BSP in 2020 when it was reduced by 200 basis points to 12 percent.

The RRR of rural banks (RBs) and thrift banks (TBs) decreased by 100 basis points to 3 percent and 2 percent, respectively, in the same year.

Prior to this, monetary authorities stated their intention to reduce big banks’ RRR to a single digit by this year.

When the markets believe that domestic inflation is now back within the government’s target range of 2 to 4 percent, according to Medalla, is the ideal time to reduce RRR.

He predicts that starting in October of this year, the inflation rate will revert to within target levels.

The average inflation rate for this year was 8.6 percent as of the end of February.

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