HSBC sees BSP further cutting bank reserve req’t

MANILA, Philippines — British banking giant HSBC expects the Bangko Sentral ng Pilipinas (BSP) to further slash the level of deposits banks are required to keep with the central bank in the fourth quarter.

Noelan Arbis, economist at HSBC, said in a recent Philippine central bank watch the BSP would likely lower the reserve requirement ratio (RRR) by one percent to 17 percent from the current 18 percent.

“Meanwhile, we continue to expect further cuts to the RRR, with another 100 basis point cut likely in 4Q18 when liquidity conditions usually tighten,” Arbis said.

The BSP’s Monetary Board has already reduced the RRR twice this year to 18 percent from 20 percent, releasing around P190 billion in additional liquidity in the financial system to support the country’s growing economy.

The first reduction that took effect last March 2 injected P90 billion worth of fresh funds into the system followed by another 100 basis point cut last June 1. This poured in around P100 billion in additional liquidity into the economy.

BSP Governor Nestor Espenilla Jr. is looking at slashing the “ultrahigh” RRR level to single-digit levels.

Despite the series of cuts, the Philippines still has the highest RRR in the region compared to China’s 17 percent, Brazil’s 15.5 percent, Indonesia’s 12 percent, Thailand’s six percent, Taiwan’s six percent, India’s four percent, Malaysia’s 3.5 percent, Singapore’s three percent, and Japan’s 0.8 percent.

Espenilla said the RRR was not discussed during the rate-setting meeting of the BSP’s Monetary Board last June 20.

“The Monetary Board did not discuss that (RRR) at all. Don’t you think we’ve already been very active, we’ve done two rate hikes and the reserve requirement. So I think that is enough for now,” he added.

As part of its medium-term financial market reform agenda, the central bank continues to pursue the gradual and phased reduction in the reserve requirement ratios. It is also part of the BSP’s broad financial sector reform agenda to promote a more efficient financial system by lowering intermediation costs.

The BSP explained the operational adjustments are part of the shift toward a more market-based implementation of monetary policy that aims to gradually reduce the BSP’s reliance on reserve requirements for managing liquidity in the financial system.

The BSP said the auction-based monetary operations under the interest rate corridor (IRC) framework has allowed monetary authorities to provide more effective guidance to short-term market interest rates, which should help facilitate healthy price discovery on the cost of funds in the financial system.

The BSP has so far delivered back to back rate hikes this year to curb additional inflationary pressures. It first raised interest rates by 25 basis points for the first time in more than three years last May 10, followed by another 25 basis point hike last June 20.

Inflation has breached the two to four percent target of the BSP as it averaged 4.1 percent in the first five months of the year. Inflation inched up to a fresh five-year high of 4.6 percent in May from 4.5 percent in April due to rising oil prices and the impact of the implementation of Republic Act 10963 or the Tax Reform for Acceleration and Inclusion (TRAIN) Law.

Arbis said HSBC believes the two rate hikes are already enough as the looming downward pressure on rice prices would put a lid on inflation and ease pressures for the BSP to tighten rates further.

“HSBC expects no further hikes to monetary policy this year,” Arbis said.