More RRR, rate cuts in 2H – FMIC

Published July 8, 2019, 12:00 AM

by manilabulletin_admin

By Lee C. Chipongian

The central bank is expected to further reduce both the interest rate and the reserve requirement ratio (RRR) this year by 50 basis points (bps) and 200 bps, respectively, according to a Metrobank affiliate.

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First Metro Investment Corp. (FMIC) President Rabboni Francis Arjonillo yesterday said the Bangko Sentral ng Pilipinas (BSP), after deciding to reduce RRR by 200 bps in tranches until end-July, is not done yet and will likely slash the reserves ratio by another two percent before 2019 ends.

“The policy rate and RRR cuts are aimed at stimulating growth to propel the economy forward, to cheapen the cost of money, encourage borrowings, spur consumption spending and secure the ability of the people to pay for loans and debts,” said Arjonillo.

He said the second half of the year will see more bond investments as the market expects the BSP un-pausing and cutting its benchmark rate by 50 bps. Last May 9, with the declining inflation, the Monetary Board eased policy rate by 25 bps.

“We think the market will remain conducive for bond investments in the second half as we anticipate the BSP to further cut the reserve requirement by another two percent (or 200 bps) and potentially reduce policy rates by 50 bps from its current levels as inflation continues to drop.
These cuts should produce positive effects for the economy and the financial markets because there would be more funds available for consumers and businesses,” said Arjonillo.

The BSP may do these two things since the market “reacted positively” when they decided to reduce the RRR from 18 percent to 16 percent. FMIC noted that 10-year bonds dropped to five percent from 5.8 percent, and that there was “buying in the long-end of the curve and prices have gone up.”

“The BSP also hopes to attract more foreign investments because the financial conditions are more relaxed and therefore more conducive to business expansion, resulting in a more positive environment for businesses seeking funds. The reduction on RRR would also deepen the debt market, open up new borrowing channels, and keep the country competitive relative to its Asian peers,” said FMIC.

Still, at 16 percent, the BSP’s RRR is one of the highest in the world. China’s RRR, for example, is at 13.5 percent, the US at 10 percent, Indonesia at six percent, India at four percent, Malaysia at 3.5 percent, Vietnam at three percent, Singapore at 2.5 percent, Thailand at one percent and Japan at 0.8 percent.

During its mid-year economic briefing, FMIC said for 2019, they think the GDP will grow by six percent to 6.5 percent, while inflation will likely settle within the range of 2.7 percent to three percent this year.
The peso they expect to continue trading at P52-P53:$1 for the rest of the year.

BSP Governor Benjamin E. Diokno early on has assured the market that he will adopt the late governor Nestor A. Espenilla Jr.’s schedule of bringing down the RRR level to single-digit ratio by 2023, or at the end of his term as governor.

“Our RRR is the highest in Asia and even in the world. I made a statement that I intend to cut it to single-digit by the end of my term. Now (the) when, the timing — that will be data-dependent and (based) on market conditions, external and internal conditions. And, I think that message is well-received. People know exactly how to plan ahead,” said Diokno earlier.

“I think there’s a disadvantage if you surprise the market like if you make an announcement now and it takes effect tomorrow. It’s better to give them some time to prepare,” he added.

 
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