BSP seen trimming RRR before policy rate tweaks

THE BANGKO SENTRAL ng Pilipinas (BSP) will likely tweak reserve requirements imposed on banks before adjusting policy rates, an economist from a global bank said, with the first cut expected early next year.

Benign inflation expectations will allow the policy-setting Monetary Board to keep benchmark rates steady over the near term, an analyst from the Hongkong and Shanghai Banking Corp. (HSBC) said, noting instead that the central bank has “started laying the groundwork” to trim the reserve requirement ratio (RRR) imposed on big banks.

“[T]he BSP’s most likely next move is a cut to the RRR, not a change in its monetary policy settings. We believe that a RRR cut in the near future would be timely, given the recent increase in Treasury bonds and T-bills issuance plans,” HSBC Global Research economist Noelan Arbis said in a market report.

BSP Governor Nestor A. Espenilla, Jr. said he wants to bring down the 20% reserve standard imposed on universal and commercial banks during his six-year term, describing it as an “inefficiency” to the financial system.

The 20% RRR was last set in May 2014 and is among the highest in the world. In effect, these funds are effectively left idle and do not generate returns for the lenders.

The central bank kept key rates unchanged during their seventh review last week, noting that inflation remains within target and domestic economic activity remains firm.

Inflation averaged at 3.2% from January- October, matching the BSP’s full-year forecast and settling within the 2-4% target band. Meanwhile, economic growth has so far averaged 6.4% during the first semester.

“The stable CPI ( consumer price index) outlook suggest policy continuity for the BSP and an opportunity for a RRR cut, which we expect by 1Q18,” Mr. Arbis said.

The global bank expects the central bank to cut the reserve standard by 100 basis points between January-March, which would bring the level to 19% for big banks.

Mr. Espenilla said last week that reducing the RRR is meant to be done in a “series,” with the regulator still “finding the right timing” for such adjustments.

Mr. Arbis said the central bank has “changed its tone on the RRR” during its Nov. 9 meeting, given multiple instances where Mr. Espenilla signalled his preference to cut the level of mandated reserves.

The BSP chief has said that he wants to see the reserve standard reduced to as low as single-digit, but noted that this would have to be carefully timed to consider money supply and credit conditions so as not to disrupt financial market activity.

A one percentage point reduction in the RRR could unleash between P60-70 billion to the financial system, which could flood the market that continues to be awash with cash. Economists have warned that this could be inflationary if left unchecked.