REDUCING the reserve requirement ratio (RRR) for big banks will not necessarily lead to increased lending, Pantheon Macroeconomics said, as elevated interest rates continue to dampen demand for credit.

“The thing is, RRR cuts are a supply-side measure, which doesn’t directly address the prevailing deficiencies in credit demand, depressed in part by still-high interest rates,” Pantheon Macroeconomics Chief Emerging Asia Economist Miguel Chanco said in a report.

“Previous cuts to the RRR — notably excluding the last one in October — have been followed by a short-term improvement in loan momentum, but nothing substantial or enduring,” he added.

By March 28, the RRR of universal and commercial banks and nonbank financial institutions with quasi-banking functions will be reduced by 200 basis points (bps) to 5% from the current 7%.

The RRR for digital banks will also be lowered by 150 bps to 2.5%, while the ratio for thrift lenders will be cut by 100 bps to 0%.

Rural and cooperative banks’ RRR has been at zero since October, the last time the Bangko Sentral ng Pilipinas (BSP) cut reserve requirements.

“This reduction could have some positive effects on activity but remember that the huge RRR reductions in recent years have been motivated primarily by the structural constraints the previously high ratios placed on the financial sector,” Mr. Chanco said.

Latest BSP data showed bank lending rose by 12.2% year on year to P13.1 trillion in December.

“Crucially, resident corporate and consumer credit growth year over year is still treading water below its 2015-to-2019 average at 12.4% as at December, in spite of the 700 bps in cumulative RRR reductions since April 2020,” Mr. Chanco.

Elevated interest rates also continue to hinder businesses from ramping up loan activity.

The central bank’s latest business expectations survey showed the business outlook was less buoyant for the next 12 months, with companies citing high borrowing costs as a major risk.

The BSP last month paused its easing cycle, keeping the benchmark rate at 5.75% amid global trade uncertainties.

BSP Governor Eli M. Remolona, Jr. has also said the current interest rates are still at “restrictive territory.”

Meanwhile, Mr. Chanco also noted the relatively weak corporate loan demand.

“The BSP’s credit access index has recovered from its enforced low in 2020, but it has barely moved over the past two-and-a-half years, generally hovering below the key zero mark,” he added.

The Philippines’ reserve requirements have been the highest among countries covered by Pantheon. For example, the country’s RRR was 14% at the start of 2020 versus Indonesia’s 5.5%.

“Five years earlier, these corresponding rates stood at a staggering 20% and 8%, respectively,” Mr. Chanco added.

From a high of 20% in 2018, the central bank has since brought down the RRR to single-digit levels.

Pantheon said the central bank’s moves to cut the RRR cuts are likely finished for now.

“This reform push is probably over though,” Mr. Chanco said, citing Mr. Remolona’s earlier comments about the 5% RRR being the preferred rate.

“At this level, the Philippines’ RRR will essentially be in the middle of the pack regionally,” he added.

Mr. Remolona said he wants to bring down big banks’ RRR to zero before his term ends in 2029.

The RRR is the portion of reserves that banks must hold onto rather than lending out. When a bank is required to hold a lower reserve ratio, it has more funds to lend to borrowers. — Luisa Maria Jacinta C. Jocson