Analysts see need for cut in banks’ RRR


The Philippine central bank, widely perceived as likely to keep its key interest rates unchanged at its policy meeting this week after headline inflation hit a record low in July, now faces pressure from expectations among banks and private think tanks for a cut at least in the reserve requirement ratio (RRR) as banks take risks in supporting the economy’s growth catalysts.

Private economists warned of repercussions on growth in the local economy if bank lending slows to a less than desired pace without enough monetary support from the central bank while the commercial banks deal with fallout from an almost certain hike in the US Federal Reserve policy tightening and the slowdown in China’s economy.

Jun Trinidad, senior economist at Citi, said the BSP’s 20 percent RRR – presently the highest in Asia – must be reduced given a benign inflation environment and stronger offshore headwinds, with China providing a major drag.

“We renew our call for a monetary accommodation by way of a bank reserve cut of 1 percent, which can unleash P67.7 billion into the system,” Trinidad said.

In order to control the volume of money created by the credit operations of the banking system, the Bangko Sentral ng Pilipinas (BSP) uses the RRR to control liquidity in the system. Last year, the central bank raised the RRR twice — in March and May — from 18 percent to 20 percent to prevent a rapid rise in liquidity and credit expansion, which otherwise, could have threatened the stability of the country’s financial system.

Last month, headline inflation hit its slowest pace in 20 years at 0.8 percent, bringing the year-to-date average to 1.9 percent, or below the 2 percent to 4 percent target range set by the central bank.

Meanwhile, growth in domestic liquidity as measured by M3—representing the total amount of cash and cash-equivalent circulating within the economy—slowed to 9 percent year-on-year from a 9.3 percent rise posted in May.

Trinidad stressed that lowering the RRR would provide support to the key growth drivers of the economy while weak exchange rates could uplift remittances’ purchasing power, enhance business process outsourcing’s appeal as the public-private partnership’s big-ticket transport projects are being rolled out.

The peso has been weakening against the dollar in the face of an impending US rate hike, as trading last Wednesday showed the local currency losing more than 13 centavos to hit a five-year low after Atlanta Fed President Dennis Lockhart said September may be the right time for the Fed to lift interest rates and that only a severe shift in economic trends could deter that move.

The economist said accelerated infrastructure spending led by the government in April and May would probably lead other spending catalysts in insulating domestic demand from an export meltdown.

“A bank reserve cut would complement these growth catalysts while ensuring a supportive bank credit risk appetite, if and when the Fed signals and acts to tighten its policy rates,” he said.

Analysts from Metrobank Research, Security Bank Corp., University of Asia and the Pacific (UA&P), Bank of the Philippine Islands (BPI) and the United Kingdom-based investment bank Barclays expressed a similar view.

“We expect no change in the policy rates [by the BSP]but we see a potential 1 percentage point cut in the reserve requirement,” said Metrobank Research analyst Mabellene Reynaldo.

Security Bank economist Patrick Ella thinks the BSP will at least consider a cut in the reserve ratio, possibly by 100 basis points.

“Banks and bond market participants have taken big losses up to now, and if this persists, bank lending may slow down to an undesirable pace, and the economy may not grow as fast as it possibly can,” Victor Abola, economist at private think tank UA&P, said.

Emilio Neri Jr., lead economist and vice president at the BPI, said the central bank may cut the RRR eventually as year-to-date inflation is seen slipping below 2 percent for at least another month, “while the surge in domestic liquidity last year has abated, with growth in domestic liquidity slowing to single digits.”

Barclays analysts have said there could be outside risks of easing in the reserve ratio for banks if liquidity conditions deteriorate due to capital outflows on the back of a potential US rate hike. They said that while near-term inflationary pressures looked manageable, drier-than-normal weather conditions could affect agriculture production, which could in turn, risk stoking inflation.


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