The central bank had previously flagged a plan to eventually cut the reserve ratio (RRR) from 20 percent, which was among the highest in the region, as it reduces its reliance on the tool to manage liquidity in the financial system.
It has maintained such a move should not be mistaken as a change in monetary policy in one of the fastest-growing economies in Asia.
But the timing of the RRR announcement came as a surprise, coming on the eve of a public holiday and after wild swings in global financial markets. And, it was not made as usual at a scheduled policy meeting.
The move also came as a Reuters poll showed investors have been adding to their bearish bets on the peso, which has been the worst performing currency in Asia this year, shedding 2.8 percent against the US dollar.
The cut will bring the amount of reserves banks need to park with the central bank to 19 percent, effective on March 2.
Central bank governor Nestor Espenilla has said the planned RRR cuts are part of the bank's financial market reforms, following its shift to an interest rate corridor system in June 2016.
"In deciding to reduce the reserve requirement ratios, the Monetary Board reaffirms the (Philippine central bank's) commitment to gradually lessen its reliance on reserve requirements for managing liquidity in the financial system," it said in a statement.
The one-percentage point reduction will inject more than 80 billion pesos ($1.53 billion) into the financial system, but less than 100 billion pesos, Zeno Abenoja, central bank director, told reporters.
Such an infusion of funds would risk adding to inflationary pressures in the booming economy. Some market watchers fear it is already at risk of overheating and that interest rates will have to be hiked aggressively as a result.
The central bank held rates steady in its latest policy review last week, arguing that a recent spike in inflation will moderate, but a slim majority of economists are now pencilling in a hike as early as March.
However, the central bank said on Thursday that it can mitigate the impact from the additional liquidity through its auction-based monetary operations.
Emilio Neri Jr, chief economist at Bank of the Philippine Islands, said there was "some degree of surprise" at the central bank's move, since past adjustments in RRR were announced in tandem with monetary policy decisions.
"I think some are already prepared because the governor has been very transparent that he has plans to reduce that, being a very inefficient tool for policy," Neri said.
Without the term deposit facilities to offset the increased liquidity from the RRR cut, the peso should weaken, said Neri.
"But we doubt that very much. Aside from a rate hike expected on March 22, we will probably see bigger auctions for the TDFs," he said.
The central bank has been offering term deposit facilities to help mop up liquidity and this week offered a new 14-day tenor, in addition to longer term instruments.