ANY ADJUSTMENTS to the reserve requirement ratio (RRR) imposed on big banks may be considered next year at the earliest, economists said, as liquidity remains abundant and with inflation continuing to trend higher.

“The first RRR cut is likely to happen once inflation decelerates to about three percent, which we expect to see in early 2018. The cut could be carried out two percentage points at a time,” Emilio S. Neri, Jr. lead economist at the Bank of the Philippine Islands, said in an e-mail.

Bangko Sentral ng Pilipinas (BSP) Governor Nestor A. Espenilla, Jr. said he plans to trim the 20% reserve standard imposed on universal and commercial banks, describing it as an “inefficiency” to the local financial system.

The 20% RRR, set in May 2014, is among the highest in the world. These funds are effectively left idle and do not generate returns for the lenders.

Mr. Espenilla said he wants to see the RRR reduced to single-digit levels, but noted that such changes will be done “in stages” depending on money supply conditions.

“Since inflation is gradually rising and liquidity growth continues to be strong, I think an RRR cut may be unlikely in the near term,” said Angelo B. Taningco, economist at Security Bank Corp.

Inflation averaged 3.1% in the nine months to September, with the pace of price increases on an uptrend in the past four months. At the same time, domestic liquidity grew 14.5% in September to P10.146 trillion, BSP data show.

While a RRR cut is warranted, economists were widely of the view that current conditions would not be supportive of such an adjustment, as trimming the required bank reserves would add liquidity to a market still awash with cash.

“There is ample liquidity right now in the system, which is contributing to higher inflation and lower interest rates. Reducing the reserve requirement without controlling its impact on domestic liquidity might be detrimental to price stability,” said Guian Angelo S. Dumalagan, market economist at the Land Bank of the Philippines.

“Therefore, the BSP might not cut the reserve requirement ratio until it has siphoned enough liquidity in the system in the form of higher policy rates and larger TDF (term deposit facility) volume,” Mr. Dumalagan added.

“Given current developments and the need for gradual adjustments, the BSP might begin reducing the reserve requirement ratio by mid-2018.”

Mr. Espenilla previously said that the RRR cut could be timed alongside the government’s capital market reforms that will be rolled out over the next 18 months since the plan was rolled out in October.

Ildemarc C. Bautista, vice-president and head of research at Metropolitan Bank & Trust Co., said that increased funding requirements for public infrastructure will also justify the move to unleash more bank funds into the system.

“Perhaps when the government starts issuing more debt to finance its infrastructure projects will there be a reason to cut reserves — at the minimum to help keep government borrowing costs down — but more importantly, to help ensure that money supply gets directed towards capacity-building rather than inadvertently generating asset bubbles,” Mr. Bautista said.

The Duterte administration is looking to spend roughly P8.44 trillion for public infrastructure projects, which will be supported by both domestic and foreign borrowings as well as fresh revenue collections. — Melissa Luz T. Lopez