Market expects more cuts in RRR

The central bank’s “dovishness” view on inflation, bias for growth and a relax stance on a weak peso is indicating to the market that more reserve ratio cuts are on the horizon.

“(The) BSP says that further RRR (reserve requirement ratio) cuts are on the table with market now anticipating two percentage point cuts every year for the next five years to bring bank RRR to 10 percent or lower by the end of BSP governor’s (Nestor A. Espenilla Jr.) term,” noted ING Bank senior economist Joey Cuyegkeng in a report.

The BSP on February 15 slashed RRR by 100 basis point or one percentage point to 19 percent, a surprised move at the time, following its decision to keep benchmark rate untouched.

Cuyegkeng said domestic liquidity is likely to be contained within 10 percent to 15 percent growth range which he said is non-inflationary and “appropriate for an economy growing at six percent or higher and for development of the capital markets.”

ING considers reduction in the RRR as pro-growth as this will release at least R40-billion net in the system to fund the public sector’s infra program. “The RRR cut also reduces bank’s intermediation costs. The cut in intermediation costs would increasingly become more significant with additional RRR cuts. The lower intermediation costs would also help moderate loan rates.”

As for inflation which rose to four percent in January and prompting the BSP to revise upwards its estimates for 2018 to 4.34 percent (more than the two percent to four percent target band) from 3.4 percent, Cuyegkeng said the BSP is signalling to the market that it is leaning on the dovish stance.