MANILA, Philippines–The Bangko Sentral ng Pilipinas may choose to trim the reserve requirement on banks this year to ensure ample credit supply that will oil economic growth amid a benign inflation environment, according to private economists.
In a March 2 research note, Citigroup economist Jun Trinidad said higher bank reserves might have caused the recent decline in the money multiplier due to higher reserves to deposits ratio, in turn implying less credit supply.
“Amid rapid normalization of M3 (domestic liquidity), prevailing disinflation despite recent oil price corrections and trimmer SDA (special deposit accounts), we believe there’s opportunity for a one-percentage cut in the bank reserve ratio,” Trinidad said.
While Governor Amando Tetangco Jr. of the Bangko Sentral ng Pilipinas had said that the prevailing policy rate settings remained sufficient against a bandwagon of central banks outside the United States that were on the monetary-easing mode, Trinidad said the BSP could still ease credit supply bottlenecks locally by trimming the bank reserve ratio.
The economist said the potential P65-billion money to be freed up by a one-percentage point bank reserve cut could be staggered so as not to unlock excess liquidity.
On the other hand, Trinidad cited risks of a potential decline in the money multiplier if sustained by a higher reserve requirement, thereby tightening domestic liquidity.
“Banks complying with a 20-percent reserve ratio underscores an elevated reserve-deposit ratio. This brings to light the liquidity impact unleashed by the contraction of BSP’s SDAs over the past months that buoyed up bank deposit growth had been partially neutralized by a higher bank reserve ratio,” Trinidad said.
For every P1 of deposits and deposit substitutes generated by banks in the Philippines, regulators require that 20 centavos be set aside as buffer, representing the portion that banks cannot lend out.
“We do not doubt the higher reserve requirement ratio imposed early 2014 accelerated stabilization of domestic liquidity gains. But persistent narrowing of M3 (money supply) didn’t spare bank loan growth,” Trinidad said. He noted that in January, the year-on-year loan growth of 17.3 percent marked the second month that such growth had was below 20 percent at a time of accelerating gross domestic product (GDP) momentum.
In February, the country’s annual inflation rate rose slightly to 2.5 percent from 2.4 percent in January, the first acceleration seen in seven months.
“The subdued inflation print and generally well behaved inflation path continues to afford the BSP further policy scope to keep rates unchanged,” said a March 5 research note from the Bank of the Philippine Islands written by a team led by economist Emilio Neri Jr.
The BPI research team expected the local central bank to raise interest rates this year but this was seen to be triggered by the alignment of local policy with the anticipated move of the US Federal Reserve given the need to monitor the interest rate differentials and potential implications on contagion and exchange market pressure. BPI expects the US Fed to raise rates by 50 basis points this year.
“The possibility that the BSP cuts its policy rates this year remains remote and BSP would only be compelled to slash rates only if headline inflation prints persistently stay below the lower end of its target range of 2 percent. Furthermore, any easing in the near-term may be in the realm of the reserve requirement ratio before the BSP thinks about adjusting policy rates,” the research said.