RRR cut in 2026 seen to support growth

THE BANGKO SENTRAL ng Pilipinas (BSP) may cut large banks’ reserve requirement ratio (RRR) by up to 200 basis points (bps) next year to boost the economy’s weak growth, analysts said.

Analysts said lowering banks’ reserve requirements would add to the financial system’s liquidity, leaving more room for lending activity that could help spur the economy.

“We do expect another round of RRR cut in 2026, and we project a 200-basis-point reduction, which we think could occur sometime in the first quarter,” Security Bank Research Head and Chief Economist Angelo B. Taningco told BusinessWorld in an e-mail.

If realized, universal and commercial banks’ RRR will be down to 3% from the current 5%.

Digital banks’ RRR was likewise reduced by 150 bps to 2.5%, while thrift banks’ RRR was lowered by 100 bps to 0%. The cuts took effect in the week of March 28.

Under the current easing cycle, the central bank has delivered a total of 450 bps in cuts to big banks’ RRR since October 2024, 350 bps for digital banks, 200 bps for thrift banks, and 100 bps for rural and cooperative banks.

BSP Governor Eli M. Remolona, Jr. has said after the Monetary Board’s last policy meeting this year that although the current 5% is “already pretty good,” they are open to reducing banks’ RRR to 2% within the next year or so.

However, he noted that they are not rushing to bring down the said ratio as excessive liquidity remains in the financial system.

According to Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort, about P180 billion is injected into the financial system for every 100-bp cut in big banks’ RRR.

“This would reduce banks’ intermediation costs and overall lending rates,” he said in a Viber message. “Lower lending rates and more loanable funds by banks would increase demand for loans or credit, thereby would help boost economic activities and overall economic growth.”

Mr. Ricafort also noted that a lower RRR would boost lenders’ earnings.

Meanwhile, Jonathan L. Ravelas, a senior adviser at Reyes Tacandong & Co., said an RRR cut of 100 bps to 200 bps could come in the first half of 2026 as growth remains sluggish.

“An RRR cut in 2026 is likely, but timing is everything,” he told BusinessWorld via Viber message. “A phased reduction of 100-200 basis points in the first half of the year makes sense to support growth without stoking inflation.”

In the third quarter, the country’s gross domestic product (GDP) growth slumped to 4%, the weakest print seen in over four years or since the first quarter of 2021. This brought GDP growth to an average of 5% as of September, below the government’s 5.5-6.5% target.

The BSP chief earlier said the economy might only start to recover by the latter half of next year, with growth expected to return within target by 2027.

“But let’s be clear: liquidity alone won’t fix structural issues,” Mr. Ravelas added. “If governance and accountability remain weak, extra money in the system will just leak through the cracks. The real challenge is sequencing reforms; monetary easing must go hand in hand with restoring trust and plugging the floodgates of inefficiency.”

INFLATIONARY IMPACT
Meanwhile, John Paolo R. Rivera, a senior research fellow at the Philippine Institute for Development Studies, said the BSP could deliver a cumulative 50-to-100-bp cut in RRR next year “when inflation is firmly contained and liquidity conditions allow.”

“An RRR cut would release liquidity, lower intermediation costs, and can support credit and growth, but it could add to inflation and forex pressures if timed poorly,” Mr. Rivera said in a Viber message.

However, Mr. Ricafort noted that inflation has been subdued even as the BSP slashed banks’ RRR by as much as 450 bps since October last year.

“It only has a minimal effect on inflation as other parts of its additional funds are not immediately used for lending purposes, which tend to spur demand-pull inflation,” Mr. Taningco added.

Philippine inflation eased to 1.5% in November from 1.7% in October and 2.5% in the same month last year, bringing the 11-month inflation average to match the central bank’s full-year forecast at 1.6%.

Inflation has likewise settled below the BSP’s 2-4% target for the ninth straight month. — K.K.Chan