Cut in bank reserves seen this year
The Bangko Sentral ng Pilipinas is expected to reduce the amount of cash banks are required to keep in reserve this year in order to ease the tight liquidity being experienced by the local economy, according to economists of one of the country’s largest financial institution.
At the same time, economists of the Bank of the Philippine Islands expect the monetary regulator to take advantage of the strong peso to buy US dollars from the open market to shore up its reserves that were eroded last year as fund managers shifted their assets overseas.
Most importantly, the research note issued by BPI lead economist Emilo Neri Jr. and researchers Rafael Alfonso Manalili and Krizia Kate Cetoy said that, with inflation now in a downtrend, “the economy has the opportunity to return to the sweet spot of low inflation and high growth just as election spending boosts overall demand.”
Economic growth tends to be faster during election years compared to non-election years, the team noted.
The BPI economists noted that the latest consumer price index of 4.4 percent in January supported their view that cumulative average inflation would finally return to the 2 to 4 percent target of the central bank by the second quarter of 2019, “or even earlier should oil prices remain below the $55 per barrel level.”
Despite this, the analysts predicted that the central bank would not be in a hurry to cut interest rates, which were raised by a cumulative 175 basis points last year, but would instead focus on the “low hanging fruit” that reduced bank reserves offer.
“To alleviate the liquidity challenges faced by the financial system, the BSP will likely prioritize cutting the reserve requirement ratio by 2 percentage points or more in 2019 over a policy rate cut,” the BPI team said.
Each percentage point in the reserve requirement is equivalent to approximately P90 billion, which means a 2-percentage point cut will result in an additional P180 billion flowing into the local economy—funds that can be used for productive commercial lending by banks.
“The other low-hanging fruit the BSP will likely pick over a sudden [overnight rate] cut is nonsterilized purchases of foreign currencies in the spot foreign exchange market,” the BPI analysts said.
“By keeping its policy rate attractive to portfolio flows, the BSP will be able to replenish its international reserves and infuse much-needed liquidity in the funds market,” they explained. “This can have a significant effect on liquidity since every $1 billion the BSP purchases from the foreign exchange market translates to an expansion of high powered money by roughly about P52 to 54 billion.”
