HSBC, SCB expect cut in reserve requirements

MANILA, Philippines - Investment banks Hongkong and Shanghai Banking Corp. and Standard Chartered Bank expect the Bangko Sentral ng Pilipinas (BSP) to slash the reserve requirement to release liquidity into the financial system to fund economic activities.

HSBC economist for Asia Pacific Joseph Incalcaterra said the central bank would likely reduce the reserve requirement ratio currently pegged at 20 percent with the smooth transition to the interest rate corridor (IRC) system early last month.

“It’s fair to say that volatility is subsiding but I think BSP will wait to see calm markets. In the next couple of months it’s fair game for the reserve ratio requirement. The BSP will probably be a bit patient at reducing, few percentage points at first, not a massive drop,” he said.

Incalcaterra said the shift to the IRC framework last June 3 has resulted in a loosening of conditions in the short term, given the reduction of the policy rate and the limited volume of the term deposit facility.

He pointed out the issue would be resolved as the volume of the term deposit facility increases over time.

The BSP has raised the volume of the term deposit facility to P50 billion in July from P30 billion when the facility was launched last June 3 as part of the shift to the IRC framework.

 The facility now consists of P10 billion worth of seven-day term deposits and P40 billion worth of 28-day term deposits.

“The BSP hopes the term deposit rate will move towards the policy rate of three percent and, as a result, better link money market activity to the policy rate, thus improving the transmission mechanism of monetary policy in the Philippines,” he said.

A cut in the reserve requirement ratio means the BSP would no longer allow banks to keep a portion of the reserves in their own vaults.

Jeff Ng, economist at Standard Chartered Bank, said the reserve requirement ratio would likely be reduced to 15 percent in the second half of the year.

“Following the implementation of the new framework, we expect the reverse requirement ratio to be cut several times in the second half to 15 percent from 20 percent in order to provide more liquidity,” Ng said.

The economist pointed out the BSP’s Monetary Board would likely keep interest rates steady for the rest of the year.

“We expect neutral monetary policy stance for the rest of 2016. We expect BSP to keep the policy rate unchanged at three percent for the rest of 2016 owing to balance growth and inflation risks,” Ng added.

Robust domestic demand and the benign inflation environment has allowed the BSP’s Monetary Board to keep interest rates unchanged for 14 straight rate-setting meetings since October 2014.