Philippines: The BSP’s RRR cut does not signal a policy shift
BSP to lower RRR on 30 June
Group Research - Econs, Chua Han Teng9 Jun 2023
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The Bangko Sentral Ng Pilipinas (BSP) announced on June 8 that it will reduce reserve requirement ratios (RRR) for banks, which will be effective from the reserve week starting June 30. The RRR announcement was not totally unexpected, as policymakers have been telegraphing this move for some time, with BSP Governor Medalla hinting on such possibility during the BSP’s monetary policy decision in mid-May. The RRR cuts will vary for different banks: 250bps to 9.5% for universal and commercial banks and non-bank financial institutions with quasi-banking functions, 200bps to 6.0% for digital banks, 100bps to 2.0% for thrift banks, and 100bps to 1.0% for rural banks and cooperative banks.

The first takeaway from the RRR cut is that it will be roughly net neutral for monetary policy. The BSP mentioned in its statement that the RRR decline is meant to ‘coincide with the expiration of alternative modes of compliance with reserve requirements by end-June 2023’. The BSP will also be offering the 56-day BSP Bill for the first time on June 30, which will be an additional instrument to absorb system liquidity.

By ensuring stable domestic liquidity conditions, the second takeaway is that the RRR reduction does not imply a shift in the BSP’s monetary policy stance. The BSP said that it will continue to signal its policy stance through its overnight reverse repurchase rate. After a hawkish pause in May 2023 and 425bps of cumulative hikes since May 2022, we expect the BSP keep its benchmark policy rate on hold at 6.25% for the rest of 2023 to continue anchoring inflation expectations (see ‘Philippines: The BSP on prudent and hawkish pause’). Headline inflation eased for the fourth straight month to 6.1% YoY in May, within the BSP’s monthly forecast. The disinflation was due to slower increases in transport and food items, while core pressures also moderated slightly. With the latest inflation print remaining consistent with the BSP’s assessment that headline inflation will return to its 2-4% target range by 4Q23, we think that policymakers can ‘wait and see’ for now.

Chua Han Teng, CFA

Economist - Asean
[email protected]
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