An economist of ING Bank Manila forecasts the Philippine peso to weaken following the cut in Philippines banks’ reserve requirement ratio, which the Bangko Sentral ng Pilipinas (BSP) announced Thursday.
The central bank’s policy-making Monetary Board (MB) cut banks’ reserve requirements by a percentage point to 19 percent and this will take effect on March 2, 2018.
In a statement, the central bank said the RRR cut “reaffirms the BSP’s commitment to gradually lessen its reliance on reserve requirements for managing liquidity in the financial system.”
“The Monetary Board believes that the BSP has attained sufficient progress in its shift towards the use of market-based monetary instruments since the adoption of the interest rate corridor (IRC) framework in June 2016,” it said, citing that the central bank now have ample scope to mitigate the potential liquidity impact on gradual RRR cut.
The last time the central bank adjusted RRR was in 2014 when it was hiked by a total of 50 basis points or 25 basis points each in March and May, as growth of domestic liquidity grew stronger than in the past years at a level of more than 20 percent.
To date, the country has one of the highest RRR in the world, which is the reason why some analysts have been projecting a cut as domestic inflation continue to rise and the central bank’s policy-making Monetary Board (MB) continue to keep key rates steady.
In a research note, ING Bank Manila economist Joey Cuyegkeng said the RRR cut “is consistent with the bank’s dovish bias.”
He explained that the reduction in RRR “is consistent with our perception of a dovish BSP bias following last week's statement on policy rates and upwardly-revised inflation forecast.”
Last Feb. 8, the MB kept anew the BSP’s key rates even after it revised upwards the central bank’s average inflation forecast for 2018-19.
To date, the BSP’s average inflation forecast is 4.34 percent, up from 3.4 percent during the Board’s rate-setting meet last December 14. The 2019 average inflation projection was hiked to 3.49 percent from 3.23 percent last December.
“In the December 14 meeting (of the MB), the impact of tax reform was not included in the baseline forecast. Now that TRAIN (Tax Reform for Acceleration and Inclusion) law has been passed, the baseline assessment now include the TRAIN impact,” BSP Monetary Policy Sub-Sector (MPSS) Managing Director Francisco G. Dakila Jr. said in a briefing.
Cuyegkeng said the cut in banks’ RRR also “supports the view of greater tolerance towards a weaker currency”, citing monetary officials’ statement that the cut is expected to flush in additional PHP90 billion worth of liquidity in the economy.
Amid the expected increase of liquidity in the economy, the ING Bank Manila economist said these inflows are expected to be siphoned off from the system through the central bank’s Term Deposit Facility (TDF).
On Wednesday, the central bank hiked the TDF offering for the seven-day facility to PHP50 billion from PHP40 billion in the past week while offering for the 14-day facility, which was introduced only this week, was increased to PHP40 billion from the initial level of PHP20 billion.
“The cut would still be seen as the BSP providing further stimulus to the system by encouraging banks to maintain lending and also to support the government's financing needs. We expect the currency to weaken,” the research note added.
This week, the local currency traded at its more than 11-year low to the greenback, with Thursday’s close at 52.12.