BSP has room to ease bank reserve requirements

MANILA, Philippines - The Bangko Sentral ng Pilipinas (BSP) has enough room to tweak the reserve requirement ratio for banks to stem the impact of the US Federal Reserve interest rate liftoff, British investment bank Barclays and US financial giant Citigroup said in separate reports.

In its latest Emerging Markets research note, Barclays said the BSP’s Monetary Board could ease the reserve requirement imposed on banks to minimize the impact of the impending interest rate increase by the US central bank.

“We see outside risks of easing in the reserve requirement ratio for banks, if liquidity conditions deteriorate due to capital outflows on the back of potential US rate hikes,” Barclays said.

It added the currency stability and an expected rate hike by the US Fed would keep rates stable for the time being.

Barclays said the BSP’s Monetary Board is likely to keep interest rates unchanged in its upcoming meeting on Aug. 13 as inflation is seen to pick up in the last quarter of the year.

 “As such, we continue to think it is unlikely that BSP will join other central banks in easing monetary policy.  Inflation below the band, but BSP is unlikely to respond to weaker consumer price index,” it added.

Inflation eased to a record low of 0.8 percent in July from 1.2 percent in June amid slower price adjustments in food, energy, and oil. This brought the year-to-date average inflation to 1.9 percent slightly lower than the BSP inflation target range of two percent to four percent this year.

“Low inflation will not necessarily lead BSP to ease policy conditions. With growth activity levels stable, we think the BSP is comfortable with the policy stance,” Barclays said.

While near-term inflationary pressures appear manageable, the investment bank said the drier-than-normal weather conditions could affect agriculture production that could stoke inflation.

According to Barclays, there are already signs that rice planting in the Philippines has been affected by weather resulting to higher imports.

As such, the investment bank sees the BSP hiking key policy rates in the fourth quarter of the year.

“We forecast the next policy move will be a hike, most likely in the fourth quarter of 2015 after the Fed has begun its expected tightening. Risks to our rate hike view are biased towards the move being pushed out,” the investment bank said.

Citi senior economist Jun Trinidad, meanwhile, has renewed calls for a cut in the bank reserve requirement, noting the existing 20 percent reserve ratio is the highest in the region.

“Against this benign consumer price index backdrop amid stronger offshore headwinds with the China drag as key, we renew our call for a monetary accommodation by way of a bank reserve cut of one percent,” Trinidad said.

He pointed out the move could unleash P67.7 billion into the system spurring infrastructure spending and other spending catalysts to help insulate domestic demand from an export meltdown.

The economist explained that a bank reserve cut would complement the growth catalysts while ensuring a supportive bank credit risk appetite once the US Fed acts to tighten its policy rate.

Weak exchange rates that could uplift remittances’ purchasing power, enhance business process outsourcing sector’s appeal amid big-ticket public private partnership transport projects being rolled out, comprise key growth triggers.

“BSP can afford to provide additional liquidity and help fend off near-term growth challenges. A bank reserve cut, if implemented soon, would be better positioned to ease market concerns and support duration bias,” he added.

The BSP raised the reserve requirement for universal and commercial banks to 20 percent in May last year to mop up excess liquidity in the system, tempering domestic demand and easing price pressures.

BSP has kept key policy rates unchanged since September last year. The overnight borrowing rate is pegged at four percent while the overnight lending rate is at six percent.