MANILA (UPDATE) - The Bangko Sentral ng Pilipinas is reducing the reserve requirement ratio (RRR) for universal and commercial banks by 250 basis points (bps). 

This RRR reduction will also apply to non-bank financial institutions with quasi-banking functions, the BSP said. 

The RRR will also be reduced by 200 bps for digital banks; and 100 bps for thrift banks (TBs) and for rural banks and cooperative banks (RCBs).

This means banks will have more money available for lending as the RRR sets the amount of funds that banks must hold against their deposit liabilities.

The reduction shall bring the RRRs of universal and commercial banks to 7 percent; digital banks to 4 percent; thrift banks to 1 percent; and rural and cooperative banks to zero percent, the central bank said.

The new ratios take effect on October 25 and shall apply to the local currency deposits and deposit substitute liabilities of banks and NBQBs.

"The reductions will lower intermediation costs and promote better pricing for financial services. As inflation continues to track a target-consistent path over the next two years, the BSP will reassess the need for further reductions in the RRRs to better align them with regional norms over the medium term," the central bank said. 

It added that the RRR cuts are in line with the BSP's continuing efforts to reduce distortions in the financial system. 

Global financial services group Nomura estimates that the RRR cut results in a liquidity injection of around P310 billion to P330 billion into the economy or around 1.2 percent of the full-year 2024 GDP. Nomura said this is "relatively substantial." 

"The announcement does not affect our view on monetary policy, and so we still forecast BSP to cut by 25bp at each of the October and December meetings, and by 75bp in the first three meetings in 2025, bringing the policy rate to 5 percent by May 2025," Nomura said.

The group said it sees the RRR reduction announced this early reflects BSP’s greater confidence on the inflation outlook, which is also supporting its easing cycle. 

"With inflation remaining on a downward path, BSP has scope to further remove the restrictiveness of its monetary stance. The Fed’s cutting cycle should also support more BSP rate cuts ahead, in our view, but we see these RRR cuts as supportive of our view that BSP sticks to a measured approach, i.e. 25bp clips, despite the Fed delivering an outsized 50bp this week, in part because some of the easing is already done via the RRR reduction,"  it added. 

Last month, the BSP also cut its benchmark rate by 25 basis points, saying inflation risks had receded. Remolona has said that another 25 bps cut is planned this year.