Beginning June 30 this year, the various banks and financial institutions will observe substantially lower reserves on their deposit holdings, according to the Bangko Sentral ng Pilipinas (BSP).
So-called universal and commercial banks mandated at the moment to observe a 12 percent deposit reserve need to observe only 9.5 percent at the end of the month.
The deposit reserve relates to the portion of deposits from the saving public that the banks may not lend to commercial or household borrowers but must instead keep in reserve in the vaults of the central bank at all times.
The deposit reserves are effectively a tax on deposits for the various banks but a potent liquidity tool for the BSP looking to get a good grasp on still elevated inflation of 6.6 percent as of latest and way above its target of 2 to 4 percent.
The reduction in deposit reserves also signal greater central bank confidence on the direction of interest rates over the 18-month long policy horizon that BSP governor Felipe Medalla vowed to support in the form of reductions in deposit reserves.
Months earlier, Medalla told financial reporters to cut the banks’ deposit reserves “when we are no longer under pressure to raise the policy rates” or the rate at which the BSP borrows from or lends to the industry.
“The reduction in the reserve requirement ratios (RRRs) by 250 basis points (bps) for universal and commercial banks (U/KBs) and non-bank financial institutions with quasi-banking functions (NBQBs), 200 bps for digital banks, and by 100 bps for thrift banks, rural banks, and cooperative banks. This measure shall bring the RRRs of U/KBs and NBQBs to 9.5 percent, digital banks to 6 percent, thrift banks to 2 percent, and rural and cooperative banks to 1 percent,” the BSP said.
“The new ratios taking effect on the reserve week beginning 30 June 2023 applies to the local currency deposits and deposit substitute liabilities of banks and nonbank financial institutions with quasi-banking functions (NBQBs), it added.
“The reduction in reserve ratios is intended to coincide with the expiration of alternative modes of compliance with reserve requirements by end-June 2023 and thereby ensure stable domestic liquidity and credit conditions. This operational adjustment is in line with the BSP’s ongoing efforts towards a more active and flexible approach to liquidity management through market-based monetary operations. This includes the inaugural offering on 30 June 2023 of the 56-day BSP Bill, which serves as an additional instrument for absorbing system liquidity.
“The BSP emphasizes that the lower reserve requirements do not constitute any shift in the BSP’s monetary policy settings. The BSP continues to prioritize bringing inflation back towards a target-consistent path over the medium term and will continue to signal its monetary policy stance through the key policy interest rate, or the rate on the overnight reverse repurchase facility,” the BSP said.
