British banking giant HSBC expects the Bangko Sentral ng Pilipinas to cut the reserve requirement early next year ahead of any policy rate increase amid a manageable inflation outlook.
In a Nov. 9 research note titled “Philippines’ BSP hints imminent RRR cut, not rate hike,” HSBC economist Noelan Arbis noted that BSP Governor Nestor A. Espenilla Jr. after last week’s Monetary Board meeting on the monetary policy stance said that the central bank was “crafting [a] strategy” to slash the reserve requirement ratio (RRR), which is one of the highest in the world.
The RRR stands at a high 20 percent, which means that for every P1 of deposit and deposit substitute generated by banks, regulators require that 20 centavos be set aside as buffer, representing the portion that banks cannot lend out.
“We believe that an RRR cut in the near future would be timely, given the recent increase in treasury bonds and bills issuance plans,” Arbis said.
Last month, the Bureau of the Treasury increased to P200 billion from P150 billion previously the total volume of treasury bills and bonds to be auctioned off in the fourth quarter to tap into the “very liquid market” and satisfy the strong demand for government securities.
“But even if the BSP does not cut the RRR at the next meeting, we would argue that it has already started laying the groundwork for a cut in the foreseeable future by outlining a reform plan to deepen the country’s financial markets. It is worth emphasizing, however, that an RRR cut does not mean a change in the BSP’s monetary stance but is part of the BSP’s transition to the interest rate corridor [IRC],” Arbis said.
Since June last year, the BSP has been implementing the IRC, aimed at bringing market rates closer to the policy rate of 3 percent by mopping up excess liquidity.
According to Arbis, HSBC expects the RRR to be cut by 100 basis points toward the end of the first quarter of next year.
“Steady core inflation also reaffirms our view that the BSP could cut the RRR by at least 100 bps in the foreseeable future as underlying prices continue to average a manageable level of 2.9 percent for the year,” Arbis said.