The Governor of the Bangko Sentral ng Pilipinas (BSP), Eli Remolona Jr., is advocating for a reduction in the reserve requirement on banks in the Philippines. The current ratio of 9.5 percent is higher than most other Southeast Asian countries. Remolona believes that ideally, the reserve requirement should be “zero” like in the United States, and he envisions a possible reduction to 5 percent in the future. This move would free up more money for banks to stimulate the economy and lower intermediation costs. However, Remolona emphasizes that the timing of this reduction should not detract from monetary policy considerations.
In recent years, the BSP has made significant reductions in the reserve requirement, but it remains higher than the ratios seen in other countries in the region. For example, Malaysia has a ratio of only 2 percent, Thailand 1 percent, and Vietnam 3 percent. Remolona acknowledges that there is still a perception in the Philippines that the reserve requirement is an effective tool for controlling money supply. While he supports inflation targeting as the appropriate framework for the country, he suggests studying the merits of the reserve requirement as part of the monetary arsenal. He favors freeing up more money for banks and using the BSP’s overnight reverse repurchase facility to address any excess liquidity.
The first reduction in the reserve requirement under Remolona’s leadership may occur later this year, once the monetary tightening cycle ends. Currently, the BSP is not in a rush to cut interest rates and remains in a hawkish stance. Remolona explains that easing monetary policy will only be considered once inflation is within the target range.
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