BSP to absorb P360-B excess liquidity - HSBC

At a glance

  • BSP to mop up P360.1 billion of extra bank funds via BSP bills.

  • With higher-than-expected RRR cut, the net effect on liquidity will be “positive but limited," says HSBC.

  • As catch basin for excess money supply, the BSP will issue an additional 56-day securities tenor on June 30.

The Bangko Sentral ng Pilipinas (BSP) will absorb an estimated P360.1 billion fresh funds that will flood the financial system by end-June after BSP lowered the reserve requirement ratios (RRR) of both banks and non-banks, according to British bank HSBC.

HSBC economist Aris Dacanay in a commentary said the higher-than-expected RRR cut of 250 basis points (bps) for big banks will release this much extra liquidity since a BSP relief measure will also expire on June 30, the same day the reserves ratio will be reduced.

Dacanay said that since the size of the RRR cut “will be slightly larger than the relief provided by the pandemic-era measures on reserves” he estimated that the net effect on liquidity will be “positive but limited”.

“Taken all together, we estimate the net effect to be P87.7 billion. This will be a net injection of liquidity in the system, but a limited one, given that it represents just 6.3% of the excess liquidity currently being absorbed by the BSP,” he said on Friday, June 9.

Dacanay said the market was expecting a lower RRR cut of 200 bps to match the expiring relief measure that allowed banks to use lending to micro, small and medium enterprises (MSMEs) and eligible large enterprises as compliance to the reserve requirement. As of April, banks’ loans as alternative compliance to the reserve requirement stood at P302.4 billion. Of the total, P236.9 billion are loans to MSMEs and P65.5 billion are borrowed by large enterprises that are not affiliated with conglomerates.

Still, Dacanay noted that with more tenors under BSP’s securities facility including the debut of the 56-day BSP bills also on June 30, the central bank is well-prepared to mop up the excess money supply.

“As communicated by the BSP, we don't think the RRR cut will affect monetary policy and the central bank's battle against inflation. On the same day as the RRR cut, the BSP will be issuing its new tool to absorb liquidity in the system - the 56-day BSP bill. The liquidity injected by the RRR cut will likely be absorbed by this new tool on that same day,” he said.

He added that “the timing (of the RRR cut) is important since without the relief measures expiring, the RRR cut may be interpreted as a dovish signal by the BSP at time when inflation is high.”

The BSP since 2017 announced that by mid-2023, the RRR will be single-digit levels to lower intermediation costs. Also, because the BSP’s RRR is one of the highest in the region – at one time it was at 20 percent in 2014 – they had to commit to reduce the reserves ratio over time.

By June 30, big banks’ RRR as well as non-banks with quasi-banking functions will be 9.5 percent from 12 percent, while digital banks’ RRR will be six percent from eight percent. Thrift banks’ RRR are slashed to a low of two percent from three percent, while rural and cooperative banks will only have an RRR of one percent.

The new ratios will apply to the local currency deposits and deposit substitute liabilities of banks and non-banks.

Meanwhile, as catch basin for the extra bank funds, the BSP will issue an additional 56-day BSP bill.

In May, the BSP has absorbed P1.52 trillion of financial system liquidity through its liquidity facilities. The BSP bills mopped up about 30.9 percent or P470 billion of this amount.

The BSP’s primary monetary policy instrument is the interest rate on its reverse repurchase facility. But BSP has the option to reduce banks’ RRR to control inflation and to siphon off liquidity via the BSP bills, the term deposit facility, and the overnight repo facility, among others.