Singapore-based United Overseas Bank (UOB) believes the Bangko Sentral ng Pilipinas (BSP) will no longer slash reserve requirement ratios (RRRs) beyond its across-the-board cuts announced last week.
“With RRR for big banks reaching a mid-single digit as envisioned by the BSP under its medium-term plan, we think that the central bank may be done with the RRR cuts for now,” UOB senior economist Julia Goh and economist Loke Siew Ting said in a Feb. 21 report.
Effective next month, the ratio for big banks will be lowered by 200 basis points (bps) to five percent from the current seven percent; for digital banks, it will be reduced by 150 bps to 2.5 percent from four percent; and for thrift banks, it will decrease by 100 bps, bringing it down to zero.
However, UOB argued that lower RRRs will not prevent the BSP from further cutting key borrowing rates, the recent pause of which at 5.75 percent surprised the market.
UOB is still expecting one more 25-bp policy rate cut in June to 5.5 percent, in line with the central bank’s recent guidance. It noted that the BSP “leaves its door open for further rate easing but at a more measured pace than previously anticipated.”
Chinabank Research, meanwhile, sees that the RRR cut “could give room for the BSP to potentially delay further policy rate cuts,” as it serves as an “accommodative measure for the economy.”
It explained that similar to the previous RRR cut, the latest ratio adjustment is unlikely to fuel inflation because the central bank “has tools to mop up excess liquidity in the financial system.”
“Unlike a reduction in the policy rate, an RRR cut would provide support for economic growth without risking a depreciation of the Philippine peso,” Chinabank Research further said.
Emilio S. Neri Jr., senior vice president and lead economist at Bank of the Philippine Islands (BPI), echoes Chinabank Research’s stance, while also affirming the central bank’s move.
“This latest RRR cut is timely, as the BSP’s recent decision to keep its policy rate steady will likely mitigate any inflationary impact,” Neri said.
According to Neri, “the financial system is well-positioned to absorb the additional liquidity in an orderly manner, thanks to the central bank’s other tools for managing excess liquidity,” referring to lending limits and open market operations, among others.
“Banks have also gained valuable experience in managing liquidity from recent RRR reductions, ensuring a smooth implementation of this policy change,” Neri added.
Looking ahead, Neri expects the RRR cut to “boost lending, providing banks with greater flexibility in allocating resources.”
Chinabank Research also said the RRR cut will lower banks’ funding costs, which would lead to cheaper loan rates. This could encourage business borrowing for expansion, which would positively impact the local economy.
According to Chinabank Research, around P364 billion worth of liquidity will be infused into the financial system after the 200-bp cut in commercial banks’ RRR.