Banks await BSP decision on boosting market liquidity

MARKET watchers are split on whether the central bank will pump more cash into the economy this week amid low inflation and the expected hike in interest rates in the US next month.

The Bangko Sentral ng Pilipinas (BSP) Monetary Board will meet on Thursday to discuss interest rate settings.

Banks polled by the Inquirer were unanimous in saying interest rates will be kept steady near their current record lows. The question heading into the week is whether the BSP will announce a cut in bank reserve requirements, resulting in an instant injection of previously idle liquidity into the local markets.

“Having accelerated in April and May, infra spending would probably lead other spending catalysts in insulating domestic demand from an export meltdown,” Citi economist Jun Trinidad said in a note to clients.

“A bank reserve cut would complement these growth catalysts while ensuring a supportive bank credit risk appetite, if and when the Fed signals and acts to tighten its policy rate,” he said.

This comes amid a benign inflation forecast as the prices of major commodities such as food and fuel are expected to remain stable. In July, consumer prices rose an average of 0.8 percent, the slowest pace on record. In the seven months ending July, inflation averaged at 1.9 percent or below the full-year target range of 2 percent.

Trinidad said a 1-percent cut in reserve requirements would result in an instant release of P67.5 billion into the system.

Economists from the Bank of the Philippine Islands, Metropolitan Bank & Trust Co., and Goldman Sachs shared Citi’s expectations of a reserve requirement cut.

Jun Neri, lead economist at BPI’s market research group, said in an e-mail that the BSP would likely raise the special deposit account (SDA) rate by at least 25 basis points before the end of the year to mirror the expected increase in interest rates by the US Fed.

Neri also said the BSP may also cut the reserve requirement ratio by 1 or 2 percentage points before the end of the year to boost economic growth. He said this could be on the table during the Aug. 13 policy meeting.

“Also, a lower reserve requirement ratio could help temper unhedged foreign exchange borrowers in both the private and public sector from aggressively taking on more foreign exchange liabilities than they currently already have. We believe that our extremely lofty reserve requirement ratio has encouraged local banks to intermediate more in foreign exchange than in Philippine peso,” Neri said.

Global investment house Goldman Sachs, in a research note written by Matthieu Droumaguet dated July 23, said: “Given the currently available choice of effective policy instruments to BSP for easing monetary conditions in the country (either the SDA rate or the reserve requirement ratio), and the already-high levels of banks’ reserve requirements associated with a distortionary effect on the economy, BSP could use the opportunity to lower reserve requirements. Such a policy move would transmit into a lower 91-day T-Bill rate.”

Other banks were not convinced.

“[BSP Governor Amando M. Tetangco Jr.] commented that the committee will consider whether there is a need to change monetary stance. At the same time, he stated that liquidity is ample and credit growth is strong,” HSBC’s Trinh Nguyen said.

She said the BSP should be content in letting fiscal authorities boost economic growth by hiking spending on infrastructure and other local services.

Along with HSBC, Security Bank and ING expect monetary policy levels will remain unchanged.