BSP still has room to cut bank reserve requirement
The Bangko Sentral ng Pilipinas (BSP) may have further room to lower the reserve requirement on banks as a way of easing monetary settings in the coming year, American banking giant JP Morgan said.
In a research note, JP Morgan economist Milo Gunasinghe said the BSP’s decision to keep its overnight policy rates unchanged during the Dec. 17 monetary setting had been in line with market expectations.
“Policy rate cuts have likely run their course. The BSP surprised markets with a 25-basis point cut in November as they likely preempted the strong headwinds following the recent typhoons amid a weak economic recovery,” Gunasinghe said.
This year, the BSP has slashed its overnight policy rates by 200 basis points while the reserve requirement had been reduced by another 200 basis points.
Considering the recent spike in headline inflation, which the BSP has well acknowledged as transitory in nature given typhoon-related supply-side disruptions on food prices, the economist said it was not a surprise that the central bank kept interest rates on hold during the December monetary setting.
The country’s November inflation rate spiked to 3.3 percent from 2.5 percent in October partly due to the disruption in food supply caused by a series of typhoons.
“Looking ahead, we think the policy stance will remain accommodative in 2021, possibly in the form of more reserve ratio requirement (RRR) cuts once liquidity conditions tighten, although as the BSP governor stated in late November that monetary policy is not the only game in town, we think there is ample room for the fiscal side to pick up,” the research said.
By lowering the reserve requirement, the BSP releases additional liquidity that banks can lend out to fuel business activity.
The BSP’s overnight borrowing rate is at a record low 2 percent while interest rates on the overnight deposit and lending facilities are likewise at historic lows of 1.5 and 2.5 percent, respectively.
The central bank noted that the resurgence of COVID-19 cases globally has tempered economic activity with the reimposition of preventive measures in recent weeks. However, it also noted that optimism over the delivery of vaccines had lifted market confidence, supporting improved prospects for global growth. —Doris Dumlao-Abadilla
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