BSP may lower RRR in 2nd half

MANILA, Philippines — American banking giant Citi now expects the Bangko Sentral ng Pilipinas (BSP) to lower the level of deposits banks are required to keep with the central bank in the second half so as not to add to inflationary pressures.

Nalin Chutchotitham, economist for the Philippines at Citi, said the reserve requirement ratio (RRR) continued to grow toward the 2019 level with the expansion of the deposit base in line with the growing economy.

Chutchotitham said there remains adequate domestic liquidity to support economic expansion.

“We believe the BSP’s plan to cut banks’ RRR from 12 percent remains in the cards, but likely to happen gradually and in the second half rather than the first half of 2023, so as not to add unnecessary inflationary pressures,” Chutchotitham said.

Latest data from the central bank showed that domestic liquidity grew by six percent to P16.1 trillion in end-February, faster than the revised 5.6-percent growth recorded in January.

On the other hand, the downtrend in credit growth continued for the third straight month, slowing to 10 percent in February from 10.4 percent in January, as the aggressive rate hikes delivered by the BSP since May last year continue to eat into bank lending.

“Excess liquidity absorption via the term deposit facility and overnight deposit facility appeared to have fallen somewhat, in line with strong loan growth,” Chutchotitham said.

The BSP has so far raised key policy rates by 425 basis points, bringing the benchmark interest rate to a 16-year high of 6.25 percent from an all-time low of two percent to tame inflation and stabilize the peso.

This helped cool inflation to a six-month low of 7.6 percent in March from 8.6 percent in February, bringing the average to 8.3 percent in the first quarter of the year. This remains well above the central bank’s two to four percent target range.

The American banking giant sees the country’s gross domestic product (GDP) growth slowing to six percent this year before picking up slightly to 6.1 percent next year from 7.6 percent last year.

It is expecting the BSP to deliver another 25-basis-point hike on May 18 to ensure that inflation expectations will be well anchored.

BSP Governor Felipe Medalla earlier said in an interview with Bloomberg Televisions that the Monetary Board could resume the lowering of the RRR by the end of June.

“The only reason we’re not cutting the reserve requirement is we don’t want to confuse the markets, which is why are you cutting the reserve requirement when you are raising rates. But that confusion will be gone if we pause. Therefore, that gives us time to look at the reserve requirement,” Medalla said.

The BSP chief hinted that the central bank could pause its ongoing tightening cycle as early as May if the downtrend in inflation continues in the coming months.

From a high of 20 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.