The Bangko Sentral ng Pilipinas (BSP) is expected to keep its 6.25 percent overnight borrowing rate until the second half of 2024 as inflation gradually eases to within the target range, according to analysts.

The market also expects the BSP will reduce banks’ reserve requirement ratio (RRR) in July as part of operational adjustment. Some analysts though, view an RRR cut as a loose monetary policy and this is why the central bank has delayed the RRR reduction.

British bank HSBC in a commentary on Tuesday, June 6, said with inflation declining for the fourth month in a row in May, the BSP may be convinced to cut the RRR next month while leaving the policy rate untouched.

HSBC likewise echoed what BSP Governor Felipe M. Medalla said previously of a “pause” and “hold” stance in the next two to three Monetary Board policy meetings, or until August or September.

“(BSP) will likely keep its policy rate at 6.25%, not only in the upcoming Monetary Board meeting (22 June 2023), but even in the many meetings after. Our baseline view is for the BSP to be on hold until the 2nd half of 2024,” said HSBC.

Medalla has said that he prefers an RRR cut first before considering a policy rate cut. As such, most analysts do not see a BSP rate cut this year but expects an RRR adjustment instead.

“We expect the BSP to cut the RRR by 200bp to 10% at the same time pandemic-era policies on required reserves expire on the 30th of June. Indeed, the May CPI print should give the central bank some confidence to push through with its plan but the BSP will eventually need to look for the next appropriate time to finally bring the RRR to single digits,” said HSBC.

Ayala-led Bank of the Philippine Islands (BPI), in its own commentary on Tuesday after the government announced the May CPI, said inflation is certain to decelerate further based on emerging market conditions, barring unseen supply shocks. A declining inflation is reason enough to keep BSP rates unchanged for some time.

“The BSP has the flexibility to keep interest rates steady considering the improving outlook for inflation. This is the first time in 31 months that the real policy rate is positive. However, we are not counting out the possibility of another hike given the uncertainties surrounding the Federal Reserve. Keeping an appropriate interest rate differential between the US and the Philippines is still important as this could affect the exchange rate. With the country becoming more reliant on imports, the depreciation of the peso may prevent inflation from declining faster,” said BPI.

BPI also said it will be more appropriate for the BSP to reduce the RRR soon. It estimated that just a one percent RRR cut will translate to P150 billion of additional liquidity in the financial system.

The bank said the market may not consider an RRR cut as equal to a policy rate easing.

“Cutting the RRR at this point is not necessarily a form of easing if we consider the upcoming expiration of a regulatory relief provided by the BSP during the pandemic. (A) 2% cut in the RRR will just offset the expiration of this regulatory relief and will not translate to a significant easing of liquidity,” said BPI.

The BSP since March 2020 allowed banks to comply with the RR rule by lending to micro, small and medium enterprises and eligible large enterprises. This relief measure will expire on June 30.

Medalla has said that it will be ideal to cut the RRR on June 30 if the Monetary Board decides to no longer extend the RR-compliant loans.

Reserve requirements refer to the percentage of bank deposits and deposit substitute liabilities that banks must set aside in deposits with the BSP which they cannot lend out.