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RRR decrease anticipated by June ’23

Following the Bangko Sentral ng Pilipinas’ (BSP) decision to hold steady its key rates on Thursday, economists are now considering reducing banks’ reserve requirement ratios (RRR) as early as June this year.

After noting that domestic inflation has slowed, with the April 2023 level at 6.6 percent, down from the 14-year high of 8.7 percent last January, the BSP Monetary Board (MB), which sets policy for the central bank, kept the key rates steady.

The RRR must be reduced, according to BSP Governor Felipe Medalla, as the relief mechanisms that permitted banks to lend to SMEs as qualified RRR compliance will expire in June.

According to a report by Michael Ricafort, chief economist at Rizal Commercial Banking Corporation (RCBC), market participants are now considering a potential RRR drop by June in response to the central bank’s hint.

He claimed this is one of “the options to ease monetary policy other than a local policy rate cut, especially if there has not yet been a Fed (Federal Reserve) rate cut by then.”

The central bank’s key rates could change “as early as August 2023/second half of 2023,” according to his prediction, “if inflation eases further and if the Fed starts to cut rates by then amid signals to maintain the interest rate differential at 100 basis points to help stabilize the peso exchange rate and overall inflation.”

He states, “Local policy rates would still be largely a function of future Fed rate moves (pause or cut) as well as, fundamentally, the local inflation trend and the behavior of the peso exchange rate, which affects import prices and overall inflation.”

The RRR was last modified in 2020 for universal and commercial banks (U/KBs), when it was reduced by 200 basis points to 12 percent, making it one of the highest in Asia.

RRR is the percentage of deposits a financial institution must keep in cash reserves to have the ready access to capital required in the event of unforeseen withdrawals.

In contrast, Nicholas Mapa, senior economist for the Philippines at ING Bank, predicts that the RRR will change by June.

“We expect the BSP to maintain policy rates at 6.25 percent in the upcoming months while reducing RR by 200 bps (basis points) to 10 percent in June,” the author stated.

The BSP’s rate decision for the day was deemed “prudent” by Mapa, who also pointed out that the monetary authorities “did leave the door open for potential action should data evolve in a manner that would require additional policy moves.”

“The central bank did admit that risks to the inflation outlook are tilted to the upside, but it also believes that inflation will revert to target by the fourth quarter of 2023,” the author added.

According to him, the central bank’s key rates were put on hold “to address elevated core inflation while also refraining from hiking rates given lower 2023 and 2024 inflation forecasts.”

“We expect BSP to keep policy rates steady in the near term while standing ready to tighten further should inflation trends reverse,” he continued.

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