Banks’ RRR may be cut in H1 – StanChart

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Key rates steady in 2017; but peso seen depreciating 2.5%

The central bank may cut its reserve requirement ratio (RRR) for commercial banks in the first half of this year to release more liquidity into the financial system amid a weak peso, global banking and financial services firm Standard Chartered Bank said on Wednesday.

The London-based bank forecast a further peso depreciation in 2017, seeing the P50:$1 level breached in the third quarter.

“We do expect that there might be liquidity tightness in the mid-year and there might be a requirement to ease the RRR,” StanChart economist Chidu Narayanan said in a press briefing on Wednesday.


Since May 2015, the central bank, or Bangko Sentral ng Pilipinas (BSP), has maintained the reserve requirement at 20 percent to prevent a rapid increase in liquidity and credit expansion, which could threaten the stability of the country’s financial system if left unchecked.

Narayanan said the BSP may cut its RRR by 5 percentage points this year to 15 percent.

“We expect them to ease primarily to support liquidity. Expectation is that it will happen probably in the first half of 2016…,” he said.

Loosest monetary conditions in Asia

At the moment, monetary conditions in the Philippines are very loose, but another US Federal Reserve rate hike that could weaken the peso further might reverse this condition, the economist said.

“It is the one of the loosest in Asia, and it’s getting looser, but that might reverse by mid-year so just to ensure that there’s enough liquidity in the market, there has to be [an adjustment to the RRR],” he said.

The latest official data shows that the Philippines’ money supply continued to grow though more slowly in November than the preceding month amid higher bank lending and withdrawals by the government from the central bank.

Domestic liquidity, or M3, expanded by 12.7 percent year-on-year to P9.06 trillion in November.

Peso depreciation by 2.5%

In terms of the local currency, StanChart expects a modest depreciation in the Philippines peso of 2.5 percent
in 2017 given the compression of the current account surplus, slight overvaluation, and a relatively hands-off approach by the central bank.

“Looking beyond peso-supportive near-term seasonal dynamics, the US dollar-peso is likely to break comfortably above 50; we forecast it at 51 by the third quarter of 2017,” he said.

Neutral stance

Despite this, the economist said the BSP is expected to maintain a neutral stance and keep rates unchanged through 2017.

“It is likely to maintain banking-system liquidity through the ceiling (overnight lending facility at 3.5 percent) and floor (overnight deposit facility at 2.5 percent) of the interest rate corridor, and via the term deposit auction facility,” he said.

Above all this, StanChart said the Philippines is likely to be the fastest-growing Association of Southeast Asian Nations-6 economy in 2017.

In a survey of analysts polled by The Manila Times recently, StanChart forecast GDP growth to remain strong at 6.7 percent, or within the 6.5 percent to 7.5 percent official target range of the government.

“Strong domestic demand, increasing infrastructure investment and steady services-sector growth sho uld support the economy in the near term,” the economist added.

The reserve requirement ratio (RRR) is the proportion of current deposits that banks need to keep with the BSP, against the sum that they can loan out to borrowers.

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