BSP to cut RRR by 200 bps at the right time -- Medalla
The Bangko Sentral ng Pilipinas (BSP) will reduce big banks’ reserve requirements by 200 basis points (bps) or from 12 percent to 10 percent when the private sector’s inflation forecast match the BSP’s, said the central bank’s highest-ranking official.
BSP Governor Felipe M. Medalla said the timing of a reserve requirement ratio (RRR) reduction is crucial and it will depend on where inflation is when it happens.
“When to do it is the question,” he said over the weekend. “When people are convinced that the path of inflation is already target-consistent, we might reduce the RRR,” he added.
Medalla said as far as the BSP is concerned, with the line up of policy rate hikes this quarter of at least 50 bps to 75 bps combined, the inflation path could fall to within the government target of two percent to four percent by the third quarter.
As of Dec. 15, the central bank forecasts inflation average of 4.5 percent for 2023, which was still above the target. The Monetary Board, BSP’s policy-making arm, has raised the key rate by a cumulative 350 bps – or from two percent to 5.5 percent – in 2022 to ensure the inflation path will return to within the target as planned.
“Right now, private sector inflation forecasts are higher than ours. We think that year-on-year inflation will be below four percent in the third quarter and slightly below three percent next year,” said Medalla.
While the BSP estimates a 4.5-percent inflation average for this year, private sector economists in a survey have a higher forecast of 5.1 percent.
Both the BSP and the private sector analysts however have lower forecast for 2024 which could be attributed to the further easing in oil prices, the peso appreciation, and lower domestic growth outlook following the cumulative policy rate adjustments of the BSP.
RRRs are required reserves that applies to demand deposits, savings deposits and time deposits.
Medalla said last week that they plan to cut the RRR within the first six months of this year. Basically, changes in reserve requirements have a significant effect on money supply in the banking system.
Medalla has already signalled to the market that they will raise the BSP benchmark rate on Feb. 16 and March 23 to boost their confidence that inflation will decrease to normal levels by the third quarter after peaking at 8.1 percent last December. At the end of 2022, inflation rate averaged at 5.8 percent.
The last time the BSP reduced the RRR for big banks was March 2020, when Covid-19 was first declared a global pandemic. The BSP cut the RRR by 200 bps for universal and commercial banks and released P225 billion into the financial system as fresh bank funds and liquidity support.
By August of the same year, the BSP also reduced the RRR of thrift and rural banks by 100 bps which translated to P10 billion of additional liquidity.
Since reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP, these funds cannot be used for lending. Reservable liabilities include demand, savings, time deposit and deposit substitutes.
In March 2020, the Monetary Board has approved a maximum 400 bps cut in big banks’ RRR but only used up half of this.
A lower RRR reduces intermediation costs. Also, the liquidity released due to RRR cuts in 2020 accounted for 1.17 percent of GDP. The 200 bps policy rate cuts in 2020, on the other hand, translated to liquidity equivalent of 0.29 percent.
However, reducing the RRR will not affect the Monetary Board’s policy stance since the BSP considers the move as an operational adjustment. The market however views an RRR cut as an easing of monetary policy.