Deutsche Bank sees cut in reserve req’t


German lender Deutsche Bank said benign headline inflation rates in the Philippines could allow the Bangko Sentral ng Pilipinas to ease monetary policy by cutting banks’ reserve requirement.

In its Asia Economics Monthly report released over the weekend, the bank noted the continued easing of consumer price pressures in June.

“Both headline and core inflation moderated by 30bps (basis points) from the previous month to record 2.8 percent and 2.6 percent respectively. Headline inflation had also eased by 30 basis points to 3.1 percent in May, while core [inflation]—a proxy for underlying price pressures—moderated by 10bps to 2.9 percent,” it said.

With headline inflation averaging 3.1 percent in the first six months of 2017—just along the midpoint of the central bank’s 2 percent to 4 percent target range—Deutsche Bank revised downward its inflation forecast for the year dowward by 10 basis points to 3.1 percent.

“We see inflation inching higher from here, to peak at 3.1 percent, as against our earlier view of 3.3 percent to 3.4 percent, within August to October. Given these developments, we no longer see the BSP raising rates for the rest of 2017,” it said.

“If anything, we believe the BSP could use this window of benign inflation to cut the reserve requirement ratio…,” it added.

The reserve ratio is the proportion of current deposits that banks need to keep with the Bangko Sentral, against the sum that they can loan out to borrowers.

Since May 2015, the monetary authority has maintained the reserve requirement ratio 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.

But Deutsche Bank said the ratio can be lowered especially in the case wherein domestic liquidity tightens following resident capital outflows and further peso depreciation, as may be triggered by the continued normalization of US monetary policy.

“This may be what the new BSP Governor [Nestor Espenilla Jr.] had in mind when he remarked that the deceleration in consumer prices gives the BSP space to fine-tune its monetary instruments,” the German bank said.

Latest data showed that domestic liquidity or the amount of money circulating in the financial system expanded slightly by 11.3 percent in May, from April’s 11.2 percent rise, to P9.6 trillion. The central bank said demand for credit remained the principal driver of money supply growth.

Meanwhile, foreign portfolio investments to the Philippines in the first half of the year registered a net outflow of $460.83 billion, reversing the $593.87 million in net inflow a year earlier “due to certain domestic and international developments, such as the US air strike against Syria, global terrorist attacks, interest rate increases by the US Federal Reserve, political turmoil in the US, and the closure order for several mining companies in the country,” according to the central bank.

The Philippine peso, meanwhile, has been trading above the psychological level of P50:$1.

Lastly, Deutsche Bank said further increases in term deposit rates could signal a reserve requirement cut.

In the term deposit auction last Wednesday, the interest rate for the seven-day facility rose to 3.2189 percent from 3.1648 percent, while the 28-day tenor fell to 3.4892 percent from 3.4909 percent.


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