HSBC expects no substantial near term risks from RRR cuts

MANILA, Philippines — British banking giant HSBC said there are no substantial near term risks from the continued lowering of the level of deposits banks are required to keep with the Bangko Sentral ng Pilipinas (BSP).

Noelan Arbis, economist at HSBC, said in a recent report titled “Money Multipliers” the reduction of the reserve requirement ratio would translate to higher money supply and bank lending growth. “We do not foresee any substantial risks as a result of RRR cuts in the near term,” he said.

However, Arbis said medium-term risks could include rising non-performing loans (NPLs) and higher inflation.

“The biggest risks, in our view, are a potential rise in NPLs and higher demand-side inflation. In both cases, a more active role by the BSP would be required to ensure that sufficient macro-prudential measures are in place to carefully manage and absorb any excess liquidity in the financial system,” he said.

The Philippines, he said, has the higher RRR level in Asia.

The BSP has so far slashed the RRR for big and mid-sized banks by 400 basis points since last year.

This year, the BSP lowered the RRR for big and mid-sized banks by 200 basis points and for small banks by 100 basis points.

“Reducing the RRR is a function of the BSP’s long-term reform agenda to improve monetary rate transmission, as well as, at the current juncture, in order to help stimulate the economy at a time of growing headwinds,” Arbis said.

Recent data, however, suggest that the impact of previous RRR cuts of 400 basis points since 2018 has been rather muted.

“We believe there may be several reasons for this, including a wider trade deficit, greater government bond issuance, policy rate hikes in 2018, and the BSP’s liquidity absorption facilities,” he said.

According to Arbis, the RRR level is likely to fall to 11 percent by 2021 as further reductions are necessary to provide sufficient money supply for growth.

Each RRR cut, he said, adds more liquidity to the financial system than previous cuts by virtue of the money multiplier effect and the BSP is currently on a monetary policy easing cycle, driving up demand for bank lending and money supply growth.

“A 100 basis point cut at current levels could raise broad money supply by up to P670 billion, but the actual impact has been more muted,” he said.

The economist said the reduction since 2018 have freed up around P400 billion and according to multiplier effect should have added as much as P2.8 trillion to domestic money supply.