By Luz Wendy T. Noble

THE BANGKO SENTRAL ng Pilipinas (BSP) on Friday announced a 100-basis point reduction in banks’ reserve requirement ratio (RRR), to take effect at the start of November, setting the stage for the release of more funds for lending for productive economic activities.

The BSP said that, in its meeting on Friday, its Monetary Board slashed the RRR for universal and commercial banks, thrift banks and rural banks to 15%, five percent and three percent, respectively, to take effect “on the first day of the first reserve week of November…”

The announcement followed the MB’s decision on Thursday afternoon to slash benchmark interest rates by 25 bp for the third time this year, taking the rates for overnight reverse repurchase (RRP), as well as overnight deposit and lending to four percent, 3.5% and 4.5%, respectively.

“The cut in reserve requirements is in line with the BSP’s broad financial sector reform agenda to promote a more efficient financial system by lowering financial intermediation costs,” the BSP said in a press release.

“At the same time, the adjustment in reserve requirement ratios is aimed at increasing domestic liquidity in support of credit activity.”

The government has been moving to spur its own spending this semester after a three-and-a-half month delay in national budget enactment on Apr. 15 — on top of a 45-day ban on public works ahead of the May 13 midterm elections — deprived new projects, especially infrastructure, of funds. That, in turn, weighed on overall economic growth that disappointed at 5.5% last semester against an already tempered 6-7% government target for full-year 2019.

The BSP has been watching if earlier RRR reductions this year of up to 200 bp has fueled bank lending to productive economic activity.

BSP’s latest data show that M3 — the broadest measure of money circulating in the economy — expanded by 6.7% year-on-year to P11.9 trillion in July from a 6.4% rise in the same period a year ago. M3 also grew 0.8% from June.

Bank lending also inched up on the back of faster growth in credit to households. Latest BSP data shows that outstanding loans of universal and commercial banks expanded 11.1% year-on-year in July, faster than the 10.5% growth in June. Inclusive of reverse repurchase agreements, bank lending growth rose 10.7% in July from 10.3% the previous month.

MORE FUNDS FOR LENDING
Analysts said that this latest round of RRR cut will inject more liquidity into the financial system.

“The latest 1-percentage point cut in banks’ reserve requirements (RRR) would result to at about P110 billion in additional peso liquidity released into the financial system,” Rizal Commercial Banking Corp. Chief Economist Michael L. Ricafort said in a mobile phone message.

Both UnionBank of the Philippines Inc. Chief Economist Ruben Carlo O. Asuncion and Security Bank Corp. Chief Economist Robert Dan J. Roces believe that this latest reserve ratio cut will give a P90-billion boost to liquidity.

Mr. Asuncion recalled Mr. Diokno’s goal to for banks’ reserve requirement to “reach single digit ratio by 2022” at the end of his term.

“It’s a step towards the reform promise. This may boost the liquidity in the market and provide an expansion of economic activities through bank loans and lending,” Mr. Asuncion said in a text message.

“We think this latest RRR cut should be generally positive for the financial system and to the economy in general, as greater amounts of funds and loans will be made available to consumers and businesses… the cut is timely and will help mitigate growth risks for the rest of 2019,” Mr. Roces said in a note.

MORE CUTS TO POLICY INTEREST RATES EXPECTED
By Friday, more analysts also said that they expect further unwinding of the cumulative 175 bp interest rate hike the MB fired off last year to temper inflation — which had clocked successive multi-year highs that peaked at a nine-year-high 6.7% in September and October and fueled a decade-high 5.2% full-year 2018 average — since reductions this year have so far totaled just 75 bp.

“The path to policy rate normalization continues,” HSBC Global Research Economist Noelan Arbis said in a note e-mailed to journalists on Thursday night.

But even with “[i]nflation… likely to remain below-target in the coming months due to base-effects and benign demand-side pressures,” Mr. Arbis said “we… expect the BSP to pause on policy rate cuts for now.”

“High frequency indicators suggest that the Philippine economy is getting back on track. Government spending is picking up, exports have turned positive and consumer sentiment has turned more upbeat,” he explained.

And with the central bank expecting “upside risks to inflation in 2020… We believe it would be most prudent for the BSP to let the previous rate cuts take their course for now before engaging in additional monetary policy rate loosening.”

Moreover, as “[c]ontinued reserve requirement ratio cuts also lessen the need for additional policy rate cuts for now… We expect the BSP to cut its policy rate again by 25bp in 1Q20, bringing it down to 3.75%.

In a note on Friday, Fitch Solutions Macro Research said it expects the BSP to “maintain its dovish stance over the coming quarters, due to softer domestic demand pressures and external demand headwinds.”

“… [W]e see the possibility of a further rate cut before year-end as high, with trade tensions unlikely to improve and inflationary base effects to result in subdued Q4 price growth readings. Moreover, a more significant deterioration in economic readings into 2020 could see the BSP completely reverse the 175bps of hikes in 2018, which would mean an end-2020 policy rate of three percent,” Fitch Solutions said, even as it was quick to add that “this is not our core view.”

It believes the BSP “will take a ‘wait and see’ approach through its last two meetings in 2019” on Nov. 14 and Dec. 12 as monetary authorities expect a rebound in price pressures next year.

“… [T]his suggests that they will remain on hold for the remainder of 2019” and “will cut once again in 2020, primarily because we believe external headwinds will not abate, and as such the BSP will feel it necessary to reduce rates further” — especially as Fitch Solutions does not expect any “meaningful resolution to US-China trade tensions before the November 2020 US presidential election.”

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