HSBC expects the Bangko Sentral ng Pilipinas to announce just one more rate cut of 25 basis points in December, stressing healthy liquidity levels among banks despite their newly reduced reserve requirement ratios (RRR) and inflation risks.

“We do not think the RRR cut alters the outlook for monetary policy; inflation and growth will still determine the magnitude of easing left for 2024,” HSBC economist Aris Dacanay said Monday.

A lower RRR enables banks to lend more to clients at cheaper intermediation costs. “The RRR cut will likely inject P450 billion into the economy at first,” the economist said.

Starting 25 October, universal and commercial banks will have an RRR of 7 percent from 9.5 percent, digital banks with 4 percent from 6 percent, thrift banks with 1 percent from 2 percent and rural banks and cooperatives with 0 percent from 1 percent.

Potential inflation trigger

However, if coupled with lower interest rates, RRR cuts could lead to higher inflation due to excessive consumption of goods and services.

“We continue to expect the BSP to follow a data-dependent approach. With risks to inflation tilted to the upside for September due to recent typhoon ‘Enteng,’ we expect the BSP to keep its easing cycle at a gradual pace,” Dacanay said.

BSP already eased its policy rate by 25 basis points last month as inflation dropped to 3.3 percent within its target of 2 to 4 percent. Previously in July, inflation hit 4.4 percent.

Through BSP-issued bills, Dacanay said banks can deposit with the Central Bank their excess liquidity caused by the RRR cuts while allowing enough restraint on consumption to still grow the economy this year.

“The RRR cut is more a change in logistics, rather than a change in outcome,” he stressed.

“The financial market is already flush to begin with as businesses and households are reluctant to take in credit due to the high cost of borrowing, leading to banks parking their money in the BSP,” Dacanay continued.

He added BSP will likely just loosen its monetary policy a bit to keep healthy levels of investments and foreign exchange after the US Federal Reserve cut its own rate by a higher 50 basis points this month.