BSP may cut RRR within first half

MANILA, Philippines — The Bangko Sentral ng Pilipinas (BSP) may resume the reduction of the reserves banks are required to keep with the central bank within the first half, as part of its commitment to bring down the level to single digit this year.

In an interview with ABS-CBN News Channel (ANC), BSP Governor Felipe Medalla said the central bank’s Monetary Board is looking at lowering the reserve requirement ratio (RRR) to replace temporary measures implemented at the height of the COVID-19 pandemic.

“I think it will happen. The likelihood that it will happen in the first semester is quite high,” Medalla said.

As part of its COVID-19 response measures, the BSP lowered the RRR for big banks and slashed interest rates by 200 basis points in 2020 to cushion the impact of the global health crisis on the economy.

Other measures, including the recurring non-interest bearing loans to the national government, the P38.9 billion dividends remitted to the national coffers, and the purchase of government securities in the secondary market unleashed as much as P2.3 trillion into the financial system to boost economic activity.

From a high of 20 percent in 2018, the BSP has committed to bring down the RRR for big banks to single-digit level by 2023.

With the additional 200-basis-point cut in 2020, the portion of reserve liabilities that universal and commercial banks must hold on to instead of lend out or invest currently stands at 12 percent.

The BSP also lowered the RRR for mid-sized and small banks by 100 basis points to three and two percent, respectively.

“We don’t think it’s healthy to have a 12 percent reserve requirement. Not only that, we also had a temporary relief measure – making loans to MSMEs (micro, small and medium enterprises) qualify as reserves in fulfillment of reserve requirements. That’s going to end, so we have to replace that temporary measure with a permanent measure, which is a cut in the RRR,” Medalla said.

To tame inflation and stabilize the peso due to the aggressive rate hikes delivered by the US Federal Reserve, the BSP raised its key policy rates by 350 basis points, bringing the overnight reverse repurchase rate to a 14-year high of 5.50 percent from an all-time low of two percent.

“We don’t want to confuse the markets. It’s hard to be raising policy rates and cutting reserve requirements, although we should be able to do that because we can offset the cut in the reserve requirements by increasing our borrowings. But given the situation, the last thing that we want to do is confuse the signals. So therefore, when we are no longer under pressure to raise policy rates, then we will cut,” the BSP chief said.

According to Medalla, the BSP is seen raising interest rates by another 25 to 50 basis points in February, and is unlikely to cut rates in the immediate term as inflation would remain above the central bank’s two to four percent target range in the first half of the year before easing back to below four percent in the third quarter.

“I’m ruling out the cuts in the very short run, and I’m not ruling out the increases,” Medalla earlier said.

The BSP sees inflation easing to 4.5 percent this year and to 2.8 percent next year from 5.8 percent this year.

“Even the supply shocks, I think the worst is over. We got hit by high oil prices and finally oil shocks are fading. Then we got hit by high sugar prices and we got hit by fruits and vegetables. Then, of course, the fertilizer shortage that resulted in higher food prices as well,” he said.