Banks deposit reserves cut seen

The forecast is for the BSP to recalibrate the banks’ deposit reserves and release more liquidity into the system. contributed photo

A cut on the banks’ reserve requirement ratio (RRR) is seen no matter that the Bangko Sentral ng Pilipinas (BSP) has paused and kept the rate at which it borrows or lends un changed at the 7 February meeting of the Monetary Board.

Now that the inflation threat appears safely in their rearview mirror, we can see the central bank easing off the brake pedal ever so slightly by cutting rates in May, after reducing RRR in the first quarter

ING Bank’s senior economist Nicholas Mapa said that a reduction in the banks’ deposit reserves may be expected by then.

“We expect BSP to announce a reduction in reserve requirements at an off-cycle meeting given the Governor’s assertion that the RRR is no longer a policy tool,” Mapa said.

He said the likelihood of a cut is boosted by the marked deceleration of inflation and the relative tightness in domestic liquidity.

“The central bank will likely slash RRR as early as February with inflation decelerating while domestic liquidity conditions remain relatively tight,” he said in noting that latest M3 growth data show four straight months of single-digit expansion.

Mapa similarly anticipated for the BSP to slash its policy rates in May as a follow through of the deposit reserves cut outlook in February.

“Now that the inflation threat appears safely in their rearview mirror, we can see the central bank easing off the brake pedal ever so slightly by cutting rates in May, after reducing RRR in the first quarter,” he said.

“With growth expected to teeter close to the edge of six percent given the recent budget delay and with the inflation objective safeguarded, perhaps BSP may finally opt to give the economy an added boost to regain flagging growth momentum,” he added.

Mapa’s forecasts contrasted sharply against earlier statements from a central bank executive.

Deputy BSP Governor Diwa C. Guinigundo said they need to carefully calibrate the timing as to when to execute a cut so as not to confuse the market.

“You don’t immediately reverse course. You have to give yourself a few more observations and make sure that what you intend to achieve is on the process of being achieved,” Guinigundo said.

“A single swallow does not make a summer. So, if it is just one or two observations, it is difficult to say for sure we can now lower the RRR or we now adjust the policy rate,” he added.