In its meeting on 16 May 2019, the Monetary Board decided to reduce the reserve requirements by 200 basis points (or 2 percentage points). The reduction in the reserve requirement ratios shall be implemented according to the following schedule:

The reduction will apply to those reservable liabilities of universal and commercial banks (U/KBs) that are currently subject to a reserve requirement of eighteen (18) percent. The Monetary Board will review the potential cuts on the reserve requirements for other banks and non-bank financial institutions in the next round of reserve requirement adjustments.

In reducing the reserve requirement ratios, the Monetary Board recognized the continued downtrend in domestic inflation. In the first four months of 2019, average headline inflation fell within the National Government's target band of 3.0 percent 1.0 percentage point at 3.6 percent. The BSP was also guided by the benign inflation forecasts of 2.9 percent for 2019 and 3.1 percent for 2020. Inflation expectations have likewise shown increasing convergence with the BSP's inflation target.

The Monetary Board also expects this adjustment to help mitigate any tightness in domestic liquidity conditions due to limited public expenditure following the budget impasse in the first quarter of the year.

At the same time, the reduction in reserve requirements is part of the BSP's broad financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs. In this regard, the BSP will also continue to review its existing framework for reserve requirements to align the regulations on deposit substitutes with the provisions of the amended BSP Charter.

These operational adjustments are in line with the BSP's objectives of enhancing the effectiveness of monetary policy and deepening the domestic money market.

Source: Bangko Sentral ng Pilipinas (BSP)