BSP may lower bank reserve ratio

If inflation eases

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) is likely to reduce the level of deposits banks are required to keep with the central bank if inflation further eases in the next two months, Dutch financial giant ING Bank said.

ING senior economist Nicholas Mapa said the central bank’s Monetary Board may opt to lower the reserve requirement ratio (RRR) if inflation continues to ease.

“If inflation sustains its downward trajectory, the BSP may even opt to lower the RRR and the central bank will have inflation data for both March and April to digest ahead of the May 18 policy decision,” Mapa said.

Inflation averaged 8.6 percent in the first two months of 2023 after easing slightly to 8.6 percent in February from a 14-year high of 8.7 percent in January. It quickened to 5.8 percent last year, exceeding the BSP’s two to four percent target range, from 3.9 percent in 2021.

This prompted the BSP to revise downward its inflation forecasts to six percent from 6.1 percent for 2023, and to 2.9 percent from 3.1 percent for 2024.

Mapa said the central bank continued the tightening cycle, but downshifted to a smaller 25-basis-point hike as part of its commitment to fight inflation.

The BSP remains aggressive after raising key policy rates by 425 basis points since May last year to tame inflation and stabilize the peso that slumped to an all-time low of 59 to $1 last October.

The benchmark interest rate now stands at a 16-year high of 6.25 percent from an all-time low of two percent.

Mapa pointed out that a relatively stable peso gave BSP the space to switch to less aggressive tightening last March 23.

“Barring any fresh supply-side shocks (such as the potential emergence of African swine fever), we believe that BSP will be open to shifting to a pause at its May meeting,” Mapa said.

“BSP believes that it has done its fair share to snuff out excessive demand-side pressures with a cumulative 425-bp rate increase,” he said.

According to Mapa, BSP Governor Felipe Medalla wants to see the full impact of the monetary actions feed through to the economy and prices.

From a high of 20 percent in 2018, the BSP has committed to bring down the RRR for big banks to single-digit level by 2023.

As part of its COVID-19 response measures, the BSP lowered the RRR for big banks and slashed interest rates by 200 basis points in 2020 to cushion the impact of the global health crisis on the economy.

With the additional cuts, the portion of reserve liabilities that universal and commercial banks must hold on to instead of lend out or invest currently stands at 12 percent.

It also lowered the RRR for mid-sized and small banks by 100 basis points to three percent and two percent, respectively.

Medalla told reporters on the sidelines of the general membership meeting of the Chamber of Thrift Banks (CTB) last Friday that the lowering of the RRR is not a priority right now.

The BSP chief said early this year that the RRR could be reduced within the first half of the year but now expects the move to confuse the market as inflation has yet to ease within the central bank’s two to four percent target range.

“The latest forecast is that this might not happen until the fourth quarter this year,” Medalla added.