BSP expected to cut reserve requirement

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The reserve requirement ratio (RRR) for commercial banks could be cut early next year to release more liquidity into the financial system, banking giant HSBC said, amid higher T-bond and T-bill issuances, and manageable inflation.

The Bangko Sentral ng Pilipinas (BSP) is expected to announce a 100 basis point cut to the 20 percent RRR by the end of the first-quarter 2018, HSBC economist Noelan Arbis said in a report released during the weekend.

“We believe that a RRR cut in the near future would be timely, given the recent increase in Treasury bonds and T-bills issuance plans,” Arbis said.

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

The Bangko Sentral has kept the ratio at 20 percent since May 2014, with officials saying they wanted to prevent a rapid rise in liquidity and credit expansion that could threaten the stability of the country’s financial system.

Noelan pointed out that monetary authorities had already started laying the groundwork for a cut by outlining a reform plan to deepen the country’s financial markets

It is worth emphasizing that an RRR cut does not mean a change in the BSP’s monetary stance but is part of the transition to the interest rate corridor, he added.

“Steady core inflation also reaffirms our view that the BSP could cut the RRR by at least 100bp in the foreseeable future, as underlying prices continue to average a manageable level of 2.9 percent for the year,” he said.

HSBC also agrees with the central bank that there are upside risks to headline inflation, especially in light of the Duterte administration’s tax reform proposal, which proposes additional taxes on fuel and sugar products in addition to other reforms.

Even with these upside risks, Noelan said headline inflation should remain well-anchored within BSP’s target range of 2 percent to 4 percent due to generally low inflation during the middle of this year.

“As such, we believe much of the work has been done on keeping inflation within target for 2017. We expect headline inflation to average 3.2 percent for 2017 and 3.3 percent for 2018, before moderating back down to 3.2 percent in 2019,” he said.

The Bangko Sentral chief has said that he wants to reduce banks’ required reserves, a move monetary authorities will have to manage to ensure that the additional liquidity benefits the economy.

“The reserve requirement is something that I would like to personally see [go]to single-digit level,” BSP Governor Nestor Espenilla Jr. said last month.

Monetary authorities, he added, will have to follow a “game plan” to reduce the reserve requirement.

“Our game plan is to do it in such as way to avoid the situation that we are unleashing too much liquidity that the economy is unable to absorb,” he said.

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